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To Buy or Not to Buy? Uncertainty, Irreversibility, and Heterogeneous Investment Dynamics in Italian Company Data

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  • Stephen R. Bond

    (International Monetary Fund)

  • Domenico Lombardi

    (International Monetary Fund)

Abstract

This study tests for the presence of real options effects induced by uncertainty and (partial) irreversibility on fixed capital investment using Italian company data. Our approach recognizes that firm-level investment spending may, itself, be aggregated over multiple investment decisions in separate types of capital goods and empha-sizes effects of uncertainty on short-run investment dynamics. Using a survey-based measure of uncertainty related to the assessment of managers responsible for the firms' investment plans, we find evidence of heterogeneous and nonlinear dynamics pointing to a slower adjustment of investment in response to demand shocks at higher levels of uncertainty. Our results also point to an additional source of nonlinearity originating from a convex response of investment to demand shocks. Copyright 2006, International Monetary Fund

Suggested Citation

  • Stephen R. Bond & Domenico Lombardi, 2006. "To Buy or Not to Buy? Uncertainty, Irreversibility, and Heterogeneous Investment Dynamics in Italian Company Data," IMF Staff Papers, Palgrave Macmillan, vol. 53(3), pages 1-2.
    • Handle: RePEc:pal:imfstp:v:53:y:2006:i:3:p:2
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    Citations

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    Cited by:

    1. Guariglia, Alessandra, 2008. "Internal financial constraints, external financial constraints, and investment choice: Evidence from a panel of UK firms," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1795-1809, September.
    2. Saira Qasim, 2021. "Financial Constraints across Pakistani Listed Firms," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 10(2), pages 57-69, April.
    3. Colombo, Massimo G. & Croce, Annalisa & Guerini, Massimiliano, 2013. "The effect of public subsidies on firms’ investment–cash flow sensitivity: Transient or persistent?," Research Policy, Elsevier, vol. 42(9), pages 1605-1623.
    4. Ma, Yiqun, 2015. "Uncertainty and investment: Evidence from the Australian mining industry," Resources Policy, Elsevier, vol. 46(P2), pages 191-201.
    5. Bertoni, Fabio & Croce, Annalisa & Guerini, Massimiliano, 2015. "Venture capital and the investment curve of young high-tech companies," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 159-176.

    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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