A Financial Model of Investment, With an Application to the Paper Industry

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Abstract
The purpose of this study was to develop a model of investment behaviour in manufacturing industiries to discriminate the effect and that of the cost of capital. Starting from the neoclasical framework this model relaxed the assumption of contrast cost of capital and improved the description of effect of taxes. It also replaced the traditional partial adjustments process by an improved model of expecttations. The model was tested on the paper industry, It explained well investment,capacity,and prices from 1964–83,and less well the financing of investments.Simualtions using the model showed that demand shifts were the most important determinants of investment in the paper industry.