Investment and the Cost of Capital in the Nineties in France: A Panel Data Investigation

Using a large panel of 6,946 French manufacturing firms, this paper investigates the effect of the cost of capital and on cash flow on investment from 1990 to 1999. We compare several specifications of neo-classical demand for capital, taking into account transitory dynamics. The user cost of capital has a significant negative elasticity with respect to capital using traditional Within estimates, or as long as cash-flow is not added to the regressionwhen using Generalised Method of Moments estimates. When dummy variablesrelated to firms more sensitive to cash flow are added in the model, the user cost elasticityis significant again and its estimate s is at most -0,26.