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Idiosyncratic and Common Shocks to Investment Decisions

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  • Schankerman, Mark

Abstract

This Paper shows how microeconomic data on investment plans can be used to study the structure of risk faced by firms. Revisions of investment plans form a martingale, and thus reveal the underlying shocks driving investment. We decompose revisions in investment plans into micro, sector and aggregate shocks, and exploit stock market data to distinguish between structural (value-related) shocks and measurement error in investment revisions. Using panel data for US firms, we find that micro shocks are not the dominant source of risk in investment decisions, and that much of the observed micro variation is actually due to heterogeneity in firm-level responses to aggregate shocks. Firms are able to diversify most idiosyncratic investment risk, and they do not appear to be liquidity-constrained.

Suggested Citation

  • Schankerman, Mark, 2001. "Idiosyncratic and Common Shocks to Investment Decisions," CEPR Discussion Papers 2982, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:2982
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    Cited by:

    1. Paul A. de Hek, 2002. "Endogenous Technological Change under Uncertainty," Tinbergen Institute Discussion Papers 02-047/2, Tinbergen Institute, revised 08 Nov 2002.

    More about this item

    Keywords

    investment; Micro shocks; Aggregate shocks; Heterogeneity;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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