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The impact of the tail risk of demand on corporate investment: Evidence from Chinese manufacturing firms

Author

Listed:
  • Xu, Xiangyun
  • Li, Xing
  • Meng, Jie
  • Hu, Xueqi
  • Ge, Yingfan

Abstract

The tail risk of demand over the past certain periods not only affect entrepreneurs' expectations on future demand uncertainty, increase the option value of “waiting an see” for delay investment, but also affect entrepreneurs' confidence and risk appetite by adjusting the worst-case scenario in the “demand belief set”, thereby further inhibiting investment. Utilizing the year-on-year sales growth data of various manufacturing industries in China, and the General Pareto Distribution method of Extreme Value Theory to estimate tail-index parameter and tail threshold as proxies for the tail risk of industry-level demand. Combined with the firm level data, our empirical results show that the tail risk indeed affect firm investment negatively, especially after the outbreak of global financial crisis, but such focal effect is stronger for firms with non-state ownership, small size, lower productivity and stricter financing constraints. Expansionary macroeconomic policies such as monetary and fiscal policy in periods of high tail risk have a higher incentive effect on firm investment, which provides more evidence for the effectiveness of macroeconomic policies during the economic recessions.

Suggested Citation

  • Xu, Xiangyun & Li, Xing & Meng, Jie & Hu, Xueqi & Ge, Yingfan, 2024. "The impact of the tail risk of demand on corporate investment: Evidence from Chinese manufacturing firms," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).
    • Handle: RePEc:eee:pacfin:v:85:y:2024:i:c:s0927538x24000933
    DOI: 10.1016/j.pacfin.2024.102342
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    Keywords

    Industry-level demand; Tail risk; Manufacturing firms; Investment;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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