KTH/CESIS Working Paper Series in Economics and Institutions of Innovation
Investment and Performance of Firms: Correlation or Causality?
() and Hans Lööf
Abstract: The purpose of this paper is to provide empirical analysis
of the two-way causal relationship between some important investment and
performance indicators at the firm level, in particular controlling for
differences in these relationships between two cohorts of small and
middle-sized firms and large firms respectively. Investigated performance
variables include sales, value added, profit, cash flow, capital structure
and employment. A multivariate vector autoregressive approach is applied to
a panel of Swedish firms observed between 1992 and 2000. In particular, an
attempt is made to investigate whether causal relationships between R&D and
firm performance are of a transitory nature and whether the causal
relationships are similar for small and medium-sized and large firms.
Results show evidence of some two way causal relationships, which are
mainly transitory in character. Significant heterogeneity is observed in
the firms’ investment and performance behavior by their size.
Keywords: R&D investment; productivity growth; financial constraints; panel data; (follow links to similar papers)
JEL-Codes: C23; C33; G32; L19; O33; (follow links to similar papers)
33 pages, August 3, 2006
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