CAPITAL INVESTMENT DECISIONS OF LARGE INDUSTRIAL FIRMS IN MAJOR EUROPEAN COUNTRIES
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Using large-company panel data, this thesis empirically analyses investment decisions in major European countries. We particularly concentrate on three issues: the taxation of capital in the EU, the role of agency costs of debt on investment decisions, and the empirical analyses of the investment-uncertainty relationship. First, based on a dynamic system in capital and Tobin's q ratio, some simplified analytical results are derived to simulate various tax policy effects on investment. Also, for a single investment project, a model is developed to consider jointly the role of uncertainty and irreversibility in the taxation of capital. The simulation results cast doubt on the tax competition view for the domestic investment case. Second, using a Euler equation approach, an investment equation is derived to test the possible effects of agency/financial distress costs of debt on investment for UK, German and French firms. The results reveal that the agency/financial distress cost of debt does matter for the highly leveraged firms. Further, an alternative model is derived in a q theory framework to test this negative effect. The model is tested for the UK firms, and similar results are obtained. Third, by considering the product structure of firms, the firm-level investment-uncertainty relationship is tested for UK firms. Unlike previous empirical findings, the results support the two opposing views in this field. Additionally, using vector autoregression analysis, a statistical account of the aggregate investment-uncertainty relation is given for the UK. An important observation is that although the exchange rate uncertainty has negative effects on machinery and equipment investment, it has no effect on construction investment.
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