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Investment under Uncertain Market Conditions

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  • Sakellaris, Plutarchos

Abstract

This paper studies the responsiveness of firm investment to shocks in the input factor and output prices (the market conditions) by using stock market information on excess returns. The 'q' theory of investment is modified to allow for heterogeneous capital, ex post inflexible technology, and irreversible investment. A structural model linking the excess returns to a firm's equity to the firm's investment history and the evolution of the market conditions is estimated using a panel of U.S. manufacturing firms. The estimates of the cost of adjusting tile capital stock are economically sensible. They imply a high degree of sensitivity of investment to fundamental variables that affect the profitability of capital such as the market conditions and the purchase price of capital. Copyright 1995 by MIT Press.

Suggested Citation

  • Sakellaris, Plutarchos, 1995. "Investment under Uncertain Market Conditions," The Review of Economics and Statistics, MIT Press, vol. 77(3), pages 455-469, August.
    • Handle: RePEc:tpr:restat:v:77:y:1995:i:3:p:455-69
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    Cited by:

    1. Yu. Yatsenko & N. Hritonenko, 2007. "Network economics and optimal replacement of age-structured IT capital," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 65(3), pages 483-497, June.
    2. Natali Hritonenko & Yuri Yatsenko, 2008. "From Linear to Nonlinear Utility in Vintage Capital Models," Mathematical Population Studies, Taylor & Francis Journals, vol. 15(4), pages 230-248.
    3. Goetz, Renan-Ulrich & Hritonenko, Natali & Yatsenko, Yuri, 2008. "The optimal economic lifetime of vintage capital in the presence of operating costs, technological progress, and learning," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 3032-3053, September.
    4. Independent Evaluation Group, 2006. "Improving Investment Climates : An Evaluation of World Bank Group Assistance," World Bank Publications - Books, The World Bank Group, number 7000.
    5. Natali Hritonenko & Yuri Yatsenko, 2010. "Age-Structured PDEs in Economics, Ecology, and Demography: Optimal Control and Sustainability," Mathematical Population Studies, Taylor & Francis Journals, vol. 17(4), pages 191-214.

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