To Buy or Not to Buy? Uncertainty, Irreversibility, and Heterogeneous Investment Dynamics in Italian Company Data
AbstractThis study tests for the presence of real options effects induced by uncertainty and (partial) irreversibility on fixed capital investment using Italian company data. Our approach recognizes that firm-level investment spending may, itself, be aggregated over multiple investment decisions in separate types of capital goods and empha-sizes effects of uncertainty on short-run investment dynamics. Using a survey-based measure of uncertainty related to the assessment of managers responsible for the firms' investment plans, we find evidence of heterogeneous and nonlinear dynamics pointing to a slower adjustment of investment in response to demand shocks at higher levels of uncertainty. Our results also point to an additional source of nonlinearity originating from a convex response of investment to demand shocks. Copyright 2006, International Monetary Fund
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Bibliographic InfoArticle provided by Palgrave Macmillan in its journal IMF Staff Papers.
Volume (Year): 53 (2006)
Issue (Month): 3 ()
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Find related papers by JEL classification:
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
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- Colombo, Massimo G. & Croce, Annalisa & Guerini, Massimiliano, 2013. "The effect of public subsidies on firms’ investment–cash flow sensitivity: Transient or persistent?," Research Policy, Elsevier, Elsevier, vol. 42(9), pages 1605-1623.
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- Guariglia, Alessandra, 2008. "Internal financial constraints, external financial constraints, and investment choice: Evidence from a panel of UK firms," Journal of Banking & Finance, Elsevier, Elsevier, vol. 32(9), pages 1795-1809, September.
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