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The Persistent Effects of Adverse Shocks to Investment

Author

Listed:
  • Lea Best
  • Sebastian Link

  • Manuel Menkhoff

Abstract

We use a large panel survey of German manufacturing firms spanning five decades of quantitative investment plans and realizations to study the persistence of investment dynamics. We proxy adverse investment shocks with large downward revisions of firms’ investment plans. Even ten years after a 50% downward revision, annual investment remains about 15% lower. Combining the survey with balance-sheet data and survey-based shock proxies, we show that financial frictions are only part of the explanation. Persistent investment declines are also closely linked to long-lived demand shocks, suggesting that they often reflect firms’ deliberate adjustment to weaker fundamentals.

Suggested Citation

  • Lea Best & Sebastian Link & Manuel Menkhoff, 2026. "The Persistent Effects of Adverse Shocks to Investment," CESifo Working Paper Series 12876, CESifo.
    • Handle: RePEc:ces:ceswps:_12876
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    References listed on IDEAS

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    1. Şebnem Kalemli-Özcan & Luc Laeven & David Moreno, 2022. "Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis," Journal of the European Economic Association, European Economic Association, vol. 20(6), pages 2353-2395.
    2. Bachmann, Rüdiger & Zorn, Peter, 2020. "What drives aggregate investment? Evidence from German survey data," Journal of Economic Dynamics and Control, Elsevier, vol. 115(C).
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    Keywords

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    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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