Firms' investment decisions in response to demand and price uncertainty

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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Year of publication:	2004
Authors:	Fuss, Catherine ; Vermeulen, Philip
Publisher:	Brussels : National Bank of Belgium
Subject:	Investitionsentscheidung \| Gesamtwirtschaftliche Nachfrage \| Preiswettbewerb \| Risiko \| Industrie \| Belgien \| investment \| uncertainty \| real options \| survey data \| panel data

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Series:	NBB Working Paper ; 45
Type of publication:	Book / Working Paper
Type of publication (narrower categories):	Working Paper
Language:	English
Other identifiers:	88299090X [GVK] hdl:10419/144259 [Handle] RePEc:nbb:reswpp:200404-2 [RePEc]
Classification:	D21 - Firm Behavior ; D24 - Production; Capital and Total Factor Productivity; Capacity ; D81 - Criteria for Decision-Making under Risk and Uncertainty ; D92 - Intertemporal Firm Choice and Growth, Investment, or Financing ; C23 - Models with Panel Data
Source:	EconStor

Persistent link: https://www.econbiz.de/10011506567