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Firms' investment decisions in response to demand and price uncertainty

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  • Catherine Fuss

    ()
    (National Bank of Belgium, Research Department)

  • Philip Vermeulen

    ()
    (National Bank of Belgium, Research Department)

Abstract

We estimate the effect of demand and price uncertainty on firms' investment decisions from a panel of manufacturing firms. Uncertainty measures are derived from firms' subjective qualitative expectations. They are close to their theoretical counterparts, the variances of future demand and price shocks. We find that demand uncertainty depresses planned and realized investment, while price uncertainty is insignificant. This is consistent with the behavior of monopolistic firms with irreversible capital (Caballero, 1991). Further, firms revise their investment plans very little. They may do so in response to new information on sales growth, but not as a result of reduced uncertainty.

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File URL: http://www.nbb.be/doc/oc/repec/reswpp/WP45.pdf
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Bibliographic Info

Paper provided by National Bank of Belgium in its series Working Paper Research with number 45.

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Length: 33 pages
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:nbb:reswpp:200404-2

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Keywords: investment; uncertainty; real options; survey data; panel data;

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References

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  1. Bomberger, William A, 1996. "Disagreement as a Measure of Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 381-92, August.
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Cited by:
  1. Thomas Post & Katja Hanewald, 2010. "Stochastic Mortality, Subjective Survival Expectations, and Individual Saving Behavior," SFB 649 Discussion Papers SFB649DP2010-040, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Rozália Pál & Roman Kozhan, 2006. "Firms' investment under financing constraints. An euro area investigation," IEHAS Discussion Papers 0606, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences, revised 21 Jul 2006.
  3. Steffen Elstner & Eric Sims & Ruediger Bachmann, 2010. "Uncertainty and Economic Activity: Evidence from Business Survey Data," 2010 Meeting Papers 614, Society for Economic Dynamics.
  4. Mohn, Klaus & Misund, Bård, 2009. "Investment and uncertainty in the international oil and gas industry," Energy Economics, Elsevier, vol. 31(2), pages 240-248, March.
  5. Thomas Post & Katja Hanewald, 2011. "Longevity Risk, Subjective Survival Expectations, and Individual Saving Behavior," Working Papers 201111, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
  6. Farla, Kristine, 2013. "Determinants of firms' investment behaviour: A multilevel approach," MERIT Working Papers 055, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  7. Rozalia Pal & Roman Kozhan, 2008. "Firms' Investment under Financial Constraints: A Euro Area Investigation," Working Papers wp08-07, Warwick Business School, Finance Group.
  8. Gianluca Femminis, 2012. "Risk aversion heterogeneity and the investment-uncertainty relationship," DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi itemq1260, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  9. Vivek Ghosal & Yang Ye, 2013. "Business Decision-Making under Uncertainty: Evidence from Employment and Number of Businesses," CESifo Working Paper Series 4312, CESifo Group Munich.
  10. Bellmann, Lutz & Gerner, Hans-Dieter & Hübler, Olaf, 2013. "Investment under Company-Level Pacts," IZA Discussion Papers 7195, Institute for the Study of Labor (IZA).
  11. Ibrahim, Mansor H. & Ahmed, Huson Joher Ali, 2014. "Permanent and transitory oil volatility and aggregate investment in Malaysia," Energy Policy, Elsevier, vol. 67(C), pages 552-563.
  12. Bachmann, Rüdiger & Bayer, Christian, 2013. "‘Wait-and-See’ business cycles?," Journal of Monetary Economics, Elsevier, vol. 60(6), pages 704-719.

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