School of Economics and Finance

No. 639: Regional Infrastructure and Firm Investment. Theory and Empirical Evidence for Italy

Francesco Aiello , University of Calabria
Alfonsina Iona , Aston University
Leone Leonida , Queen Mary, University of London

March 1, 2009

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We model the channels through which public expenditure on infrastructure influences firm value and shapes its investment decisions via both adjustment costs and marginal profitability of capital. We test these hypotheses by using a large panel of Italian firms. Empirical results show that infrastructure interacts with revenues and costs in shaping firm's profitability of capital and influences its adjustment costs. Finally we find that infrastructure expenditure contributes to reduce the economic gap between the North and the South of Italy. These effects vary across regions and sectors.

J.E.L classification codes: D21, D62, D92

Keywords:Regional infrastructure, Firm's value, Corporate investment