Aggregate investment dynamics when firms face fixed investment cost and capital market imperfections

In this paper a model of aggregate investment is derived, which incorporates fixed investment costs and capital market imperfections on the micro-level. Aggregate investment reacts nonlinearly with respect to aggregate shocks to productivity and liquidity of firms. Employing nonparamatric kernel estimation methods to analyse a sample of annual account data of UK companies, these nonlinearities also show up empirically. Furthermore a difference in strength between the long- and the short-run effect of liquidity on investment is found, which is inconsistent with models that solely explain the empirical correlation of investment and liquidity as the result of some long-run relationship like liquidity-dependent costs-of-capital or principal-agent problems.