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Corporate Investment over the Business Cycle

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  • Thomas Dangl
  • Youchang Wu

Abstract

The average capital growth rate across firms declines sharply during a recession, and recovers only slowly. We provide a micro-founded explanation for this and several new stylized facts of investment asymmetry. Our investment model features various degrees of reversibility, cyclical macroeconomic shocks, and uncertainty about the state of the economy. Model simulations replicate strikingly different empirical patterns of capital growth rates at the aggregate and firm levels, featuring no slope asymmetry and a positive level asymmetry at the firm level, negative slope and level asymmetries at the aggregate level, and a positive relation between the industry-level slope asymmetry and asset illiquidity.

Suggested Citation

  • Thomas Dangl & Youchang Wu, 2016. "Corporate Investment over the Business Cycle," Review of Finance, European Finance Association, vol. 20(1), pages 337-371.
    • Handle: RePEc:oup:revfin:v:20:y:2016:i:1:p:337-371.
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    File URL: http://hdl.handle.net/10.1093/rof/rfv003
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    References listed on IDEAS

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    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Eisfeldt, Andrea L. & Rampini, Adriano A., 2006. "Capital reallocation and liquidity," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 369-399, April.
    3. Jean-Paul Décamps & Thomas Mariotti & Stéphane Villeneuve, 2005. "Investment Timing Under Incomplete Information," Mathematics of Operations Research, INFORMS, vol. 30(2), pages 472-500, May.
    4. Guo, Xin & Miao, Jianjun & Morellec, Erwan, 2005. "Irreversible investment with regime shifts," Journal of Economic Theory, Elsevier, vol. 122(1), pages 37-59, May.
    5. Manuel Klein, 2009. "Comment on “Investment Timing Under Incomplete Information”," Mathematics of Operations Research, INFORMS, vol. 34(1), pages 249-254, February.
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    Cited by:

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    2. Hongsheng Fang & Wen‐Quan Hu & Ruhua Shi & Xufei Zhang, 2023. "The Chinese‐style macroeconomic control: The role of state‐owned enterprises," The World Economy, Wiley Blackwell, vol. 46(3), pages 702-725, March.

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