Macroeconomic Conditions and a Firm's Investment Decisions

We propose a model of a firm's reversible investment decision with macroeconomic conditions based on optimal switching of a diffusion process. The switching costs of a diffusion regime and the cash flow generated by the firm depend on a business cycle which alternates via a Markov chain, and the investment and disinvestment triggers in each state are determined endogenously. The cyclical investment which amplifies the macroeconomic shocks is examined, while the disinvestment can be either cyclical or countercyclical depending on which factor's impact is predominate between the state-varying switching costs and the cyclical cash flow. The impact of the persistence of the business cycle also differs depending on which factor's impact is dominating