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Investment Plan Revisions and Share Price Volatility

  • Johansson, Anders

    (University of Gothenburg)

  • Modén, Karl-Markus

    (The Research Institute of Industrial Economics (IUI))

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    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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    File URL: http://www.konj.se/download/18.70c52033121865b1398800093420/WP_57.pdf
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    Paper provided by National Institute of Economic Research in its series Working Paper with number 57.

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    Length: 31 pages
    Date of creation: 01 Dec 1997
    Date of revision:
    Handle: RePEc:hhs:nierwp:0057
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    1. Pakes, Ariel, 1985. "On Patents, R&D, and the Stock Market Rate of Return," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 390-409, April.
    2. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
    3. Mark Schankerman, 1991. "Revisions of Investment Plans and the Stock Market Rate of Return," STICERD - Economics of Industry Papers 05, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    4. Caballero, Ricardo J. & Pindyck, Robert S., 1992. "Uncertainty, investment, and industry evolution," Working papers 3460-92., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    5. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1990. "The Stock Market and Investment: Is the Market a Sideshow?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 157-216.
    6. Cooper, Russell & Haltiwanger, John, 1990. "Inventories and the Propagation of Sectoral Shocks," American Economic Review, American Economic Association, vol. 80(1), pages 170-90, March.
    7. Pindyck, Robert S. & Solimano, Andres, 1993. "Economic instability and aggregate investment," Policy Research Working Paper Series 1148, The World Bank.
    8. Bertola, Guiseppe & Caballero, Ricardo J, 1994. "Irreversibility and Aggregate Investment," Review of Economic Studies, Wiley Blackwell, vol. 61(2), pages 223-46, April.
    9. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
    10. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
    11. Jovanovic, Boyan, 1987. "Micro Shocks and Aggregate Risk," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 395-409, May.
    12. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
    13. Long, John B, Jr & Plosser, Charles I, 1987. "Sectoral vs. Aggregate Shocks in the Business Cycle," American Economic Review, American Economic Association, vol. 77(2), pages 333-36, May.
    14. Mark Schankerman, 1991. "Revisions of investment plans and the stock market rate of return," LSE Research Online Documents on Economics 3735, London School of Economics and Political Science, LSE Library.
    15. repec:cup:cbooks:9780521269124 is not listed on IDEAS
    16. Blundell, Richard & Bond, Stephen & Devereux, Michael & Schiantarelli, Fabio, 1992. "Investment and Tobin's Q: Evidence from company panel data," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 233-257.
    17. Ariel Pakes, 1991. "Dynamic Structural Models: Problems and Prospects. Mixed Continuous Discrete Controls and Market Interactions," Cowles Foundation Discussion Papers 984, Cowles Foundation for Research in Economics, Yale University.
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