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Revisions of Investment Plans and the Stock Market Rate of Return

  • Mark Schankerman
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    This paper explores the sources of uncertainty that cause firms to revise their capital investment plans and the stock market to revise its valuation of those firms. A simple method is developed to decompose the uncertainty governing revisions in investment plans and the stock market rate of return into micro, sectoral and aggregate components; and to measure the degree of heterogeneity in micro responses to common disturbances. The method is applied to a panel data set of firms in the U.S. economy for the period 1950-1973. The empirical results show that the capital investment decision is governed primarily by idiosyncratic uncertainty, but common disturbances are more important for movements in the stock market rate of return.

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    Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Economics of Industry Papers with number 05.

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    Date of creation: Nov 1991
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    Handle: RePEc:cep:stieip:05
    Contact details of provider: Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

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    17. Keane, Michael P & Runkle, David E, 1990. "Testing the Rationality of Price Forecasts: New Evidence from Panel Data," American Economic Review, American Economic Association, vol. 80(4), pages 714-35, September.
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