What explains the lagged-investment effect?

►Using Compustat data, we show that lagged investment is a better predictor of current investment than Q and cash flow combined. ►We show that the new adjustment formulation proposed by Christiano, Eichenbaum and Evans (CEE) implies a lagged investment effect. ►A generalization of the CEE model provides a good description of the patterns of volatility, persistence and comovement present in firm-level data.