Firm investment in transition: Evidence from Romanian manufacturing

In this paper a model based on the Euler equation of optimal capital accumulationin the presence of convex adjustment costs is developed and estimated. Thetheoretical model explicitly allows for differential financial status across firms.The empirical analysis uses Romanian manufacturing firm panel data to estimatedynamic investment models with the generalized method of moments (GMM-IV)technique and tests the derived hypotheses. The results indicate that the modelbased on the perfect market assumptions is rejected. The version of the model thatallows for differential financial status of firms by using a theoretically derivedsample selection rule is not rejected by the data. Controlling for soft budgetconstraints, common for transition economies, further improves the performanceof the model.