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 Page 1


Chapter Eight
Components of Capital
Expenditures—
Replacement and
Modernization versus
Expansion
INTRODUCTION AND DESCRIPTION OF DATA
Probably more than half of capital expenditures involve, in
one sense or another, the replacement of existing stock.
The timing and determinants of replacement expenditures
have given rise to a host of competing hypotheses, some of which are
listed below.
1. Replacement expenditures are a fairly constant proportion of
capital.
2. Replacement expenditures substitute for expansion expenditures,
thus stabilizing the annual rate of investment, falling when
expansion increases and rising when expansion decreases.
3. They are closely tied or essentially equal to depreciation charges.
4. They vary with the current rate of profit or flow of funds.
5. They are positively related to the age of capital stock.
The McGraw-Hill capital expenditure survey data and collateral
statistics offer a unique opportunity to test these and related
hypotheses. Feldstein and Foot (1971) utilized McGraw-Hill aggrega-
tive reports, along with a series from the Department of Commerce
on planned capital expenditures and from the Federal Trade Com-
mission and Securities Exchange Commission on flow of funds, in an
Note: An earlier version of this paper was presented at the Second World
Congress of the Econometric Society in Cambridge, England, in September
1970.
175
Page 2


Chapter Eight
Components of Capital
Expenditures—
Replacement and
Modernization versus
Expansion
INTRODUCTION AND DESCRIPTION OF DATA
Probably more than half of capital expenditures involve, in
one sense or another, the replacement of existing stock.
The timing and determinants of replacement expenditures
have given rise to a host of competing hypotheses, some of which are
listed below.
1. Replacement expenditures are a fairly constant proportion of
capital.
2. Replacement expenditures substitute for expansion expenditures,
thus stabilizing the annual rate of investment, falling when
expansion increases and rising when expansion decreases.
3. They are closely tied or essentially equal to depreciation charges.
4. They vary with the current rate of profit or flow of funds.
5. They are positively related to the age of capital stock.
The McGraw-Hill capital expenditure survey data and collateral
statistics offer a unique opportunity to test these and related
hypotheses. Feldstein and Foot (1971) utilized McGraw-Hill aggrega-
tive reports, along with a series from the Department of Commerce
on planned capital expenditures and from the Federal Trade Com-
mission and Securities Exchange Commission on flow of funds, in an
Note: An earlier version of this paper was presented at the Second World
Congress of the Econometric Society in Cambridge, England, in September
1970.
175
176 Factors in Business Investment.
where
analysis of replacement expenditures. This chapter offers a partly
parallel analysis of expansion as well as replacement expenditures on
1
the basis of individual firm data.
Key to the analysis is a question that has been included in the
McGraw-Hill spring surveys in the years 1952 through 1955 and from
1957 to date: "Of the total amount you now plan to invest in new
plants and equipment in [the current year] how much is for:
K
expansion
_____%;
replacement and modernization
_____%?"
Ap-
plying the indicated proportions to anticipated and actual capital
D
expenditures has resulted in estimates of expenditures for replace-
p
ment and modernization as well as expenditures for expansion. In
the case of actual expenditures, these estimates related to from 112
R
to 254 firms in each of the fourteen years from 1954 to 1968,
excluding 1956.' Estimates of anticipated expenditures were avail-
up
able for approximately the same firms.
The basic data are as follows:2
and
Intervals for
Variable Utilized Observations
Superscripts e a
=
[0.6, 0)
zation, respecti
anticipated and
=
[0.6, 0)
indicate years (
=
(Je/J)_l
[1, 0] =
=
[0.4, 0) and = (1 —
[0.7, 0.4]
are "actual" as
tures.4
=
[1, 0]
was denol
4The McGraw-I
[1.3, 0.3]
tions of
all years except 19
* were included or
[0.7, 0.6]
anticipations with
expenditures.
'Small numbers of observations, forty-nine for 1952 and sixty-seven for
Tables 84, 8-2,
1953, were eliminated from the final analysis when 1967 and 1968 data became
total expenditures
available because the capacity of our regression program was limited to a total of for expansion
fourteen years.
estimates of "àcti
modernization).
2Srackets again indicate closed intervals, parentheses, semiopen intervals,
expenditures do ni
excluding lower bounds. Some 6 percent of observations were rejected because
is inexact. We ha
one or more of the variables contained "extreme values," outside the indicated
anticipated expend
intervals. Elimination of extreme values or "outliers" in these individual firm
data has seemed prudent in order to minimize the possibility of substantial
impact due to reporting or processing errors and/or extremely low denominators
j
for variables in ratio form.
Page 3


Chapter Eight
Components of Capital
Expenditures—
Replacement and
Modernization versus
Expansion
INTRODUCTION AND DESCRIPTION OF DATA
Probably more than half of capital expenditures involve, in
one sense or another, the replacement of existing stock.
The timing and determinants of replacement expenditures
have given rise to a host of competing hypotheses, some of which are
listed below.
1. Replacement expenditures are a fairly constant proportion of
capital.
2. Replacement expenditures substitute for expansion expenditures,
thus stabilizing the annual rate of investment, falling when
expansion increases and rising when expansion decreases.
3. They are closely tied or essentially equal to depreciation charges.
4. They vary with the current rate of profit or flow of funds.
5. They are positively related to the age of capital stock.
The McGraw-Hill capital expenditure survey data and collateral
statistics offer a unique opportunity to test these and related
hypotheses. Feldstein and Foot (1971) utilized McGraw-Hill aggrega-
tive reports, along with a series from the Department of Commerce
on planned capital expenditures and from the Federal Trade Com-
mission and Securities Exchange Commission on flow of funds, in an
Note: An earlier version of this paper was presented at the Second World
Congress of the Econometric Society in Cambridge, England, in September
1970.
175
176 Factors in Business Investment.
where
analysis of replacement expenditures. This chapter offers a partly
parallel analysis of expansion as well as replacement expenditures on
1
the basis of individual firm data.
Key to the analysis is a question that has been included in the
McGraw-Hill spring surveys in the years 1952 through 1955 and from
1957 to date: "Of the total amount you now plan to invest in new
plants and equipment in [the current year] how much is for:
K
expansion
_____%;
replacement and modernization
_____%?"
Ap-
plying the indicated proportions to anticipated and actual capital
D
expenditures has resulted in estimates of expenditures for replace-
p
ment and modernization as well as expenditures for expansion. In
the case of actual expenditures, these estimates related to from 112
R
to 254 firms in each of the fourteen years from 1954 to 1968,
excluding 1956.' Estimates of anticipated expenditures were avail-
up
able for approximately the same firms.
The basic data are as follows:2
and
Intervals for
Variable Utilized Observations
Superscripts e a
=
[0.6, 0)
zation, respecti
anticipated and
=
[0.6, 0)
indicate years (
=
(Je/J)_l
[1, 0] =
=
[0.4, 0) and = (1 —
[0.7, 0.4]
are "actual" as
tures.4
=
[1, 0]
was denol
4The McGraw-I
[1.3, 0.3]
tions of
all years except 19
* were included or
[0.7, 0.6]
anticipations with
expenditures.
'Small numbers of observations, forty-nine for 1952 and sixty-seven for
Tables 84, 8-2,
1953, were eliminated from the final analysis when 1967 and 1968 data became
total expenditures
available because the capacity of our regression program was limited to a total of for expansion
fourteen years.
estimates of "àcti
modernization).
2Srackets again indicate closed intervals, parentheses, semiopen intervals,
expenditures do ni
excluding lower bounds. Some 6 percent of observations were rejected because
is inexact. We ha
one or more of the variables contained "extreme values," outside the indicated
anticipated expend
intervals. Elimination of extreme values or "outliers" in these individual firm
data has seemed prudent in order to minimize the possibility of substantial
impact due to reporting or processing errors and/or extremely low denominators
j
for variables in ratio form.
Components of Capital Expenditures 177
where
offers a partly
expenditures Ofl
capital expenditures of the year t
ft
= capital expenditure anticipations for the year
included in the
t+ i
1955 and from
t + 1(presumably held at the end of the year t and
to invest in new
reported in the spring survey of the year t + 1)
r much is for:
K = gross fixed assets
_____%?"
Ap-
depreciation charges
dactual capital
res for replace-
P = profits after taxes
r expansion. In
ted to from 112
R depreciation reserves
1954 to 1968,
U" = actual utilization of capacity
tures were avail-
= preferred utilization of capacity
and L1s_1 = expected and ex post relative sales changes, respec-
tively.3
Superscripts e and r denote expansion or replacement and moderni-
zation, respectively. Time superscripts indicate that variables are
anticipated and reveal the year of anticipations, and time subscripts
indicate years (or ends of years) to which variables apply.
*
t—1
*
i7 = = (1 =
rt
*
and = (1
are "actual" and anticipated expansion and replacement expendi-
tures.4
was denoted in Eisner (1967).
4The McGraw-Hill surveys have included questions as to anticipated propor-
tions of expenditures for expansion and for replacement and modernization in
all years except 1956, but questions as to the actual proportions, viewed ex post,
were included only irregularly. Feldstein and Foot (1971) matched these
6]
anticipations with the Department of Commerce series for anticipated capital
expenditures.
rid sixty-seven for Tables 8-1, 8-2, and 8-3 relate to and the products of reported actual
I 1968 data became total expenditures divided by gross fixed assets and the proportions anticipated
limited to a total of for expansion and for replacement and modernization. These are taken as
estimates of "actual" expenditures for expansion and for replacement (and
modernization). To the extent that discrepancies between actual and anticipated
semiopen intervals,
expenditures do not fall evenly on the two anticipated components our measure
re rejected because
is inexact. We have, however, also conducted the analysis with the data for
itside the indicated
anticipated expenditures
Lese individual firm
ility of substantial
.et t
y low denominators
= et+i
and = (1
q+1
I
Page 4


Chapter Eight
Components of Capital
Expenditures—
Replacement and
Modernization versus
Expansion
INTRODUCTION AND DESCRIPTION OF DATA
Probably more than half of capital expenditures involve, in
one sense or another, the replacement of existing stock.
The timing and determinants of replacement expenditures
have given rise to a host of competing hypotheses, some of which are
listed below.
1. Replacement expenditures are a fairly constant proportion of
capital.
2. Replacement expenditures substitute for expansion expenditures,
thus stabilizing the annual rate of investment, falling when
expansion increases and rising when expansion decreases.
3. They are closely tied or essentially equal to depreciation charges.
4. They vary with the current rate of profit or flow of funds.
5. They are positively related to the age of capital stock.
The McGraw-Hill capital expenditure survey data and collateral
statistics offer a unique opportunity to test these and related
hypotheses. Feldstein and Foot (1971) utilized McGraw-Hill aggrega-
tive reports, along with a series from the Department of Commerce
on planned capital expenditures and from the Federal Trade Com-
mission and Securities Exchange Commission on flow of funds, in an
Note: An earlier version of this paper was presented at the Second World
Congress of the Econometric Society in Cambridge, England, in September
1970.
175
176 Factors in Business Investment.
where
analysis of replacement expenditures. This chapter offers a partly
parallel analysis of expansion as well as replacement expenditures on
1
the basis of individual firm data.
Key to the analysis is a question that has been included in the
McGraw-Hill spring surveys in the years 1952 through 1955 and from
1957 to date: "Of the total amount you now plan to invest in new
plants and equipment in [the current year] how much is for:
K
expansion
_____%;
replacement and modernization
_____%?"
Ap-
plying the indicated proportions to anticipated and actual capital
D
expenditures has resulted in estimates of expenditures for replace-
p
ment and modernization as well as expenditures for expansion. In
the case of actual expenditures, these estimates related to from 112
R
to 254 firms in each of the fourteen years from 1954 to 1968,
excluding 1956.' Estimates of anticipated expenditures were avail-
up
able for approximately the same firms.
The basic data are as follows:2
and
Intervals for
Variable Utilized Observations
Superscripts e a
=
[0.6, 0)
zation, respecti
anticipated and
=
[0.6, 0)
indicate years (
=
(Je/J)_l
[1, 0] =
=
[0.4, 0) and = (1 —
[0.7, 0.4]
are "actual" as
tures.4
=
[1, 0]
was denol
4The McGraw-I
[1.3, 0.3]
tions of
all years except 19
* were included or
[0.7, 0.6]
anticipations with
expenditures.
'Small numbers of observations, forty-nine for 1952 and sixty-seven for
Tables 84, 8-2,
1953, were eliminated from the final analysis when 1967 and 1968 data became
total expenditures
available because the capacity of our regression program was limited to a total of for expansion
fourteen years.
estimates of "àcti
modernization).
2Srackets again indicate closed intervals, parentheses, semiopen intervals,
expenditures do ni
excluding lower bounds. Some 6 percent of observations were rejected because
is inexact. We ha
one or more of the variables contained "extreme values," outside the indicated
anticipated expend
intervals. Elimination of extreme values or "outliers" in these individual firm
data has seemed prudent in order to minimize the possibility of substantial
impact due to reporting or processing errors and/or extremely low denominators
j
for variables in ratio form.
Components of Capital Expenditures 177
where
offers a partly
expenditures Ofl
capital expenditures of the year t
ft
= capital expenditure anticipations for the year
included in the
t+ i
1955 and from
t + 1(presumably held at the end of the year t and
to invest in new
reported in the spring survey of the year t + 1)
r much is for:
K = gross fixed assets
_____%?"
Ap-
depreciation charges
dactual capital
res for replace-
P = profits after taxes
r expansion. In
ted to from 112
R depreciation reserves
1954 to 1968,
U" = actual utilization of capacity
tures were avail-
= preferred utilization of capacity
and L1s_1 = expected and ex post relative sales changes, respec-
tively.3
Superscripts e and r denote expansion or replacement and moderni-
zation, respectively. Time superscripts indicate that variables are
anticipated and reveal the year of anticipations, and time subscripts
indicate years (or ends of years) to which variables apply.
*
t—1
*
i7 = = (1 =
rt
*
and = (1
are "actual" and anticipated expansion and replacement expendi-
tures.4
was denoted in Eisner (1967).
4The McGraw-Hill surveys have included questions as to anticipated propor-
tions of expenditures for expansion and for replacement and modernization in
all years except 1956, but questions as to the actual proportions, viewed ex post,
were included only irregularly. Feldstein and Foot (1971) matched these
6]
anticipations with the Department of Commerce series for anticipated capital
expenditures.
rid sixty-seven for Tables 8-1, 8-2, and 8-3 relate to and the products of reported actual
I 1968 data became total expenditures divided by gross fixed assets and the proportions anticipated
limited to a total of for expansion and for replacement and modernization. These are taken as
estimates of "actual" expenditures for expansion and for replacement (and
modernization). To the extent that discrepancies between actual and anticipated
semiopen intervals,
expenditures do not fall evenly on the two anticipated components our measure
re rejected because
is inexact. We have, however, also conducted the analysis with the data for
itside the indicated
anticipated expenditures
Lese individual firm
ility of substantial
.et t
y low denominators
= et+i
and = (1
q+1
I
178 Factors in Business Investment
Capital expenditures and capital expenditure anticipations, the
capacity variables, expected sales changes, and the expansion-replace-
ment ratios are taken from the McGraw-Hill surveys. The other
variables are from financial reports, generally as recorded in Moody's.
All flow variables (I, sales, and P) except depreciation charges
are price-deflated, with indexes set at 1.00 in 1954. The stock
variables, gross fixed assets and depreciation reserves are not price-
deflated.5
The body of data available proved sufficient to generate up to
2,692 individual firm observations in six broad industry groups, as
indicated in Table 8-lB. The bulk of the observations, however, was
in manufacturing.
RELATIVE STABILITY OF REPLACEMENT
VERSUS EXPANSION INVESTMENT
Table 8-1 offers a variety of evidence on the relatively greater
stability of replacement expenditures as a proportion of gross fixed
assets. From a quick visual inspection of the table's section A, it is
clear that reported expenditures for replacement and modernization
were not only higher than those for expansion in every year except
one (1957), averaging some 60 percent of total expenditures, but
also markedly more stable. The standard deviation of the annual
mean ratios of replacement expenditures to previous gross fixed
assets was 0.0056, as against 0.01 16 for the corresponding figures for
expansion investment, and the coefficients of variation (standard
deviation divided by mean) shown in section B were 0.1241 for the
former, compared with 0.3762 for the latter. This comparison holds
up at both the industry and individual firm levels. Replacement
and results were not substantially different from those for the "actual"
expenditures. In Table 8.4, where we seek to isolate and compare determinants
of expansion and replacement expenditures, we report results for the anticipated
expenditures, which should facilitate comparison with the Feldstein and Foot
analysis of determinants of replacement expenditures.
Table 8-1.
Car
Expansion, 195
Year
Replacement
(t)
(Ic)
1968 .0401
1967 .0449
1966 .0493
1965 .0486
1964 .0482
1963 .0421
1962 .0418
(1)
Observations
Time Series
Aggregate
lndustriesb
Finns
Primary metals
Metalworking
Chemical processi
All other
Mining
Petroleum
All industriesC
Cross Sections
Aggregate
Industries
Firms, within indus
tThe use of undeflated gross fixed assets raises some problems. In principle, a
measure of net capital stock in constant prices, corresponding to current real
capacity, would be better. Measures of price-deflated gross fixed assets obtained
by utilizing ratios of accumulated previous deflated and undeflated capital
expenditures were employed in other work (Eisner, 1967, pp. 371, 384-86), but
did not appear to affect the results sufficiently to warrant the substantial
consequent loss in observations (due to lack of full information on previous
capital expenditures). In a crude way, the failure to depreciate for decreasing
capacity or efficiency with age and the failure to appreciate for rising prices may
be taken as compensating errors, so that the gross fixed assets measure may
come as close to representing real capital stock as any other imperfect measure
that we might readily employ. We may further note the finding by Feldstein and
Foot (1971, pp. 53, 55, and footnote 22) that estimates of the relations with
which we are concerned prove insensitive to the measure of capital stock,
including the substitution of a net capital series for the gross capital figures that
they used.
aSee Chapter 1 for
bN0 observations we
one or more years in
were no observations
cFirm time series s
number of total obsel
Note: Table Mi-b a
expenditures vai
aggregates, in ar
firms in each
available.
Page 5


Chapter Eight
Components of Capital
Expenditures—
Replacement and
Modernization versus
Expansion
INTRODUCTION AND DESCRIPTION OF DATA
Probably more than half of capital expenditures involve, in
one sense or another, the replacement of existing stock.
The timing and determinants of replacement expenditures
have given rise to a host of competing hypotheses, some of which are
listed below.
1. Replacement expenditures are a fairly constant proportion of
capital.
2. Replacement expenditures substitute for expansion expenditures,
thus stabilizing the annual rate of investment, falling when
expansion increases and rising when expansion decreases.
3. They are closely tied or essentially equal to depreciation charges.
4. They vary with the current rate of profit or flow of funds.
5. They are positively related to the age of capital stock.
The McGraw-Hill capital expenditure survey data and collateral
statistics offer a unique opportunity to test these and related
hypotheses. Feldstein and Foot (1971) utilized McGraw-Hill aggrega-
tive reports, along with a series from the Department of Commerce
on planned capital expenditures and from the Federal Trade Com-
mission and Securities Exchange Commission on flow of funds, in an
Note: An earlier version of this paper was presented at the Second World
Congress of the Econometric Society in Cambridge, England, in September
1970.
175
176 Factors in Business Investment.
where
analysis of replacement expenditures. This chapter offers a partly
parallel analysis of expansion as well as replacement expenditures on
1
the basis of individual firm data.
Key to the analysis is a question that has been included in the
McGraw-Hill spring surveys in the years 1952 through 1955 and from
1957 to date: "Of the total amount you now plan to invest in new
plants and equipment in [the current year] how much is for:
K
expansion
_____%;
replacement and modernization
_____%?"
Ap-
plying the indicated proportions to anticipated and actual capital
D
expenditures has resulted in estimates of expenditures for replace-
p
ment and modernization as well as expenditures for expansion. In
the case of actual expenditures, these estimates related to from 112
R
to 254 firms in each of the fourteen years from 1954 to 1968,
excluding 1956.' Estimates of anticipated expenditures were avail-
up
able for approximately the same firms.
The basic data are as follows:2
and
Intervals for
Variable Utilized Observations
Superscripts e a
=
[0.6, 0)
zation, respecti
anticipated and
=
[0.6, 0)
indicate years (
=
(Je/J)_l
[1, 0] =
=
[0.4, 0) and = (1 —
[0.7, 0.4]
are "actual" as
tures.4
=
[1, 0]
was denol
4The McGraw-I
[1.3, 0.3]
tions of
all years except 19
* were included or
[0.7, 0.6]
anticipations with
expenditures.
'Small numbers of observations, forty-nine for 1952 and sixty-seven for
Tables 84, 8-2,
1953, were eliminated from the final analysis when 1967 and 1968 data became
total expenditures
available because the capacity of our regression program was limited to a total of for expansion
fourteen years.
estimates of "àcti
modernization).
2Srackets again indicate closed intervals, parentheses, semiopen intervals,
expenditures do ni
excluding lower bounds. Some 6 percent of observations were rejected because
is inexact. We ha
one or more of the variables contained "extreme values," outside the indicated
anticipated expend
intervals. Elimination of extreme values or "outliers" in these individual firm
data has seemed prudent in order to minimize the possibility of substantial
impact due to reporting or processing errors and/or extremely low denominators
j
for variables in ratio form.
Components of Capital Expenditures 177
where
offers a partly
expenditures Ofl
capital expenditures of the year t
ft
= capital expenditure anticipations for the year
included in the
t+ i
1955 and from
t + 1(presumably held at the end of the year t and
to invest in new
reported in the spring survey of the year t + 1)
r much is for:
K = gross fixed assets
_____%?"
Ap-
depreciation charges
dactual capital
res for replace-
P = profits after taxes
r expansion. In
ted to from 112
R depreciation reserves
1954 to 1968,
U" = actual utilization of capacity
tures were avail-
= preferred utilization of capacity
and L1s_1 = expected and ex post relative sales changes, respec-
tively.3
Superscripts e and r denote expansion or replacement and moderni-
zation, respectively. Time superscripts indicate that variables are
anticipated and reveal the year of anticipations, and time subscripts
indicate years (or ends of years) to which variables apply.
*
t—1
*
i7 = = (1 =
rt
*
and = (1
are "actual" and anticipated expansion and replacement expendi-
tures.4
was denoted in Eisner (1967).
4The McGraw-Hill surveys have included questions as to anticipated propor-
tions of expenditures for expansion and for replacement and modernization in
all years except 1956, but questions as to the actual proportions, viewed ex post,
were included only irregularly. Feldstein and Foot (1971) matched these
6]
anticipations with the Department of Commerce series for anticipated capital
expenditures.
rid sixty-seven for Tables 8-1, 8-2, and 8-3 relate to and the products of reported actual
I 1968 data became total expenditures divided by gross fixed assets and the proportions anticipated
limited to a total of for expansion and for replacement and modernization. These are taken as
estimates of "actual" expenditures for expansion and for replacement (and
modernization). To the extent that discrepancies between actual and anticipated
semiopen intervals,
expenditures do not fall evenly on the two anticipated components our measure
re rejected because
is inexact. We have, however, also conducted the analysis with the data for
itside the indicated
anticipated expenditures
Lese individual firm
ility of substantial
.et t
y low denominators
= et+i
and = (1
q+1
I
178 Factors in Business Investment
Capital expenditures and capital expenditure anticipations, the
capacity variables, expected sales changes, and the expansion-replace-
ment ratios are taken from the McGraw-Hill surveys. The other
variables are from financial reports, generally as recorded in Moody's.
All flow variables (I, sales, and P) except depreciation charges
are price-deflated, with indexes set at 1.00 in 1954. The stock
variables, gross fixed assets and depreciation reserves are not price-
deflated.5
The body of data available proved sufficient to generate up to
2,692 individual firm observations in six broad industry groups, as
indicated in Table 8-lB. The bulk of the observations, however, was
in manufacturing.
RELATIVE STABILITY OF REPLACEMENT
VERSUS EXPANSION INVESTMENT
Table 8-1 offers a variety of evidence on the relatively greater
stability of replacement expenditures as a proportion of gross fixed
assets. From a quick visual inspection of the table's section A, it is
clear that reported expenditures for replacement and modernization
were not only higher than those for expansion in every year except
one (1957), averaging some 60 percent of total expenditures, but
also markedly more stable. The standard deviation of the annual
mean ratios of replacement expenditures to previous gross fixed
assets was 0.0056, as against 0.01 16 for the corresponding figures for
expansion investment, and the coefficients of variation (standard
deviation divided by mean) shown in section B were 0.1241 for the
former, compared with 0.3762 for the latter. This comparison holds
up at both the industry and individual firm levels. Replacement
and results were not substantially different from those for the "actual"
expenditures. In Table 8.4, where we seek to isolate and compare determinants
of expansion and replacement expenditures, we report results for the anticipated
expenditures, which should facilitate comparison with the Feldstein and Foot
analysis of determinants of replacement expenditures.
Table 8-1.
Car
Expansion, 195
Year
Replacement
(t)
(Ic)
1968 .0401
1967 .0449
1966 .0493
1965 .0486
1964 .0482
1963 .0421
1962 .0418
(1)
Observations
Time Series
Aggregate
lndustriesb
Finns
Primary metals
Metalworking
Chemical processi
All other
Mining
Petroleum
All industriesC
Cross Sections
Aggregate
Industries
Firms, within indus
tThe use of undeflated gross fixed assets raises some problems. In principle, a
measure of net capital stock in constant prices, corresponding to current real
capacity, would be better. Measures of price-deflated gross fixed assets obtained
by utilizing ratios of accumulated previous deflated and undeflated capital
expenditures were employed in other work (Eisner, 1967, pp. 371, 384-86), but
did not appear to affect the results sufficiently to warrant the substantial
consequent loss in observations (due to lack of full information on previous
capital expenditures). In a crude way, the failure to depreciate for decreasing
capacity or efficiency with age and the failure to appreciate for rising prices may
be taken as compensating errors, so that the gross fixed assets measure may
come as close to representing real capital stock as any other imperfect measure
that we might readily employ. We may further note the finding by Feldstein and
Foot (1971, pp. 53, 55, and footnote 22) that estimates of the relations with
which we are concerned prove insensitive to the measure of capital stock,
including the substitution of a net capital series for the gross capital figures that
they used.
aSee Chapter 1 for
bN0 observations we
one or more years in
were no observations
cFirm time series s
number of total obsel
Note: Table Mi-b a
expenditures vai
aggregates, in ar
firms in each
available.
Components of Capital Expenditures 179
latively greater
n of gross fixed
section A, it is
I modernization
ery year except
penditures, but
i of the annual
ous gross fixed
iding figures for
ation (standard
0.1241 for the
Dmparison holds
s. Replacement
for the "actual"
ipare determinants
for the anticipated
Feldstein and Foot
ems. In principle, a
ing to current real
,ted assets obtained
undeflated capital
• 371, 384-86), but
List the substantial
aation on previous
iate for decreasing
or rising prices may
ssets measure may
imperfect measure
ig by Feldstein and
the relations with
of capital stock,
capital figures that
Means, All Years
Standard Deviations of
Annual Mean Ratios
ticipatioflS, the
)ansion-replace-
eys. The other
led in Moody's.
eciation charges
)54. The stock
s are not price-
generate up to
ustry groups, as
.s, however, was
Table 8-1. Capital Expenditures for Replacement and Modernization and for
Expansion, 1954-1955, 1957-1968, as Ratios of Previous Gross Fixed Assets
A. Mean Ratios andNumber of Firms, by Year
Year
(I)
Replacement
(if)
Expansion
Number
of
Firms
Year
(t)
Replacement Expansion
(if)
Number
of
Firms
1968
1967
1966
1965
1964
1963
1962
.0401
.0449
.0493
.0486
.0482
.0421
.04 18
.033 7
.0363
.0433
.0341
.023 7
.0 189
.0220
112 1961
152 1960
199 1959
169 1958
203 1957
193 1955
201 1954
.0385
.0434
.0411
.0397
.0493
.0566
.0558
.0 183
.0280
.02 15
.0249
.0584
.0437
.0405
244
254
226
244
175
153
167
.0452 .0307 2692
.0056 .0116
B. Standard Deviations, Means, and Coefficients of
Variation (a/Mean)0
(1) (2) (3) (4) (5) (6) (7) (8)
Observations. n a Mean a/Mean a Mean a/Mean
Time Series
Aggregate
Industriesb
14 .0056 .0452
83 .0081 .0452
.1241
.1788
.0116
.0153
.0307
.0307
.3762
.4984
Firms .
Primary metals 231 .0226 .0352 .6428 .0625 .0323 1.9353
Metalworking 1084 .0334 .0528 .63 21 .0379 .0304 1.2458
Chemical processing 568 .0175 .0332 .5280 .0341 .0383 .8908
All other manufacturing 628 .0267 .0464 .5743 .0359 .025 2 1.4237
Mining 34 .0325 .0395 .8240 .0633 .0304 2.0867
Petroleum 80 .0264 .0546 .4838 .0327 .0186 1.7543
All industriesC 2625 .0279 .0454 .6 140 .0398 .0307 1.2979
Cross Sections
Aggregate 6 .0088 .0452 .1956 .0052 .0307 .1702
Industries 83 .0108 .0452 .2385 .0118 .0307 .3827
Firms, within industries 2692 .0322 .0452 .7 125 .0416 .0307 1.3544
aSee Chapter 1 for statement of the various deviations underlying the calculation of a.
bNo observations were available in several regressions and in these summary statistics for
one or more years in the mining and petroleum industries. For Tables 8-1, 8-2, and 8-3 there
were no observations in petroleum for 1968.
CFirm time series statistics exclude firms with only one observation—hence the lesser
number of total observations.
Note: Table Mi-jo appears only in microfiche.
expenditures vary less over time than expansion expenditures in the
aggregates, in annual means for each industry, and within individual
firms in each of the six industry groups for which data were
available.