IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/32498.html
   My bibliography  Save this paper

A Quantile Model of Firm Investment

Author

Listed:
  • Heitor Almeida
  • Murillo Campello
  • Luciano I. de Castro
  • Antonio F. Galvao Jr

Abstract

We develop a dynamic model of firm investment under uncertainty that captures firms’ risk attitude using quantile preferences. The firm maximizes its present value, defined as current profits and investment plus the discounted value of the τ-quantile of its value next period. In our framework, τ ∈ (0, 1) parametrizes the firm’s attitude toward downside risk. The model implies that the firm’s investment policy equates the marginal cost of capital with the τ-quantile of the discounted present value of future marginal profits — investment depends directly on the firm’s risk attitude. We further integrate our model into a “q-theory” of investment. Numerical solutions show how heterogeneity across τ-quantiles impacts the value of the firm and investment decisions. Empirical estimations of the quantile investment model show that the strength of the relation between investment and Tobin’s q increases as downside risk aversion decreases. Estimates of firms’ risk attitude reveal evidence of high levels of downside risk aversion.

Suggested Citation

  • Heitor Almeida & Murillo Campello & Luciano I. de Castro & Antonio F. Galvao Jr, 2024. "A Quantile Model of Firm Investment," NBER Working Papers 32498, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32498
    Note: CF
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w32498.pdf
    Download Restriction: Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:32498. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.