Investment Plan Revisions and Share Price Volatility
The aim of this paper is to investigate the nature of the links between the stock market reactions to significant news in the information set, relevant to investment decisions, and how firms from a panel revise their investment plans in light of the same information. The data on revisions in investment plans also makes it possible to estimate the relative importance of different sources of uncertainty: micro, sectoral or macro, which is an important issue in business cycle research. It is also relevant for models of investment behavoiur and for empirical models on panel data. The statistical method we use is nested (co-) variance components. Our main findings are that the link between stock market reactions to news and the firms revisions of investment plans is weak, and that microlevel uncertainty is the dominant source of uncertainty driving fluctuations in investment spending.
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