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To Buy or Not to Buy? Uncertainty, Irreversibility and Heterogeneous Investment Dynamics in Italian Company Data

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  • Domenico Lombardi
  • Stephen Bond
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    Abstract

    This study tests for the presence of real options effects induced by uncertainty and (partial) irreversibility on fixed capital investment using Italian company data. The approach recognizes that firm-level investment spending may, itself, be aggregated over multiple investment decisions in separate types of capital goods and emphasizes 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, the study finds evidence of heterogeneous and nonlinear dynamics pointing to a slower adjustment of investment in response to demand shocks at higher levels of uncertainty. The results also point to an additional source of nonlinearity originating from a convex response of investment to demand shocks.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/104.

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    Length: 29
    Date of creation: 01 Jun 2004
    Date of revision:
    Handle: RePEc:imf:imfwpa:04/104

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    Related research

    Keywords: Economic models; capital stock; survey; equations; measure of uncertainty; cost of capital; statistics; correlation; predictions; finite sample; capital accumulation; capital goods; standard errors; descriptive statistics; equation; samples; capital expenditures; sample bias; logarithm; monte carlo simulations; prediction; nonlinearity; capital market; capital adjustment; functional form; statistic; frequency distribution; logarithms; level productivity; random sample; stock market; quality control; econometrics; error variance; surveys; significance levels; number of variables; capital market imperfections;

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    2. Øivind Anti Nilsen & Fabio Schiantarelli, 2003. "Zeros and Lumps in Investment: Empirical Evidence on Irreversibilities and Nonconvexities," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1021-1037, November.
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    Cited by:
    1. Juan de Dios Tena & Francesco Giovannoni, 2005. "Market Concentration, Macroeconomic Uncertainty and Monetary Policy," Bristol Economics Discussion Papers 05/576, Department of Economics, University of Bristol, UK.
    2. Domenico Lombardi & Stephen Bond, 2005. "Why is Micro Evidenceon the Effects of Uncertainty Not Replicated in Macro Data?," IMF Working Papers 05/158, International Monetary Fund.

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