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Investment plans, innovations and revision costs in Finnish manufacturing

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  • Pyyhtiä, Ilmo

Abstract

In this paper the reasons for revisions of announced investment plans are analyzed theoretically and empirically. In earlier studies by the author it was shown that investment plans and final investments differ systematically from each other. The theoretical framework is based on neoclassical investment theory, rational expectations and partial adjustment of investment plans. The effects of uncertainty are also studied. The empirical results show that investment plans are endogeneous to the firm and can change as the picture of demand or relative prices of factors of production change. So, the information set relevant to the determination of investment plans can be defined with conventional investment theory. According to the estimation results, reactions to shocks decrease when the survey horizon shortens. This supports the hypothesis on the increasing revision costs of investment plans as the realization time approaches. The results concerning demand uncertainty give some support to the theoretical result that an increase in demand uncertainty may reduce investments.

Suggested Citation

  • Pyyhtiä, Ilmo, 1991. "Investment plans, innovations and revision costs in Finnish manufacturing," Bank of Finland Research Discussion Papers 19/1991, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp1991_019
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    References listed on IDEAS

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    1. Kennan, John, 1979. "The Estimation of Partial Adjustment Models with Rational Expectations," Econometrica, Econometric Society, vol. 47(6), pages 1441-1455, November.
    2. Abel, Andrew B., 1984. "The effects of uncertainty on investment and the expected long-run capital stock," Journal of Economic Dynamics and Control, Elsevier, vol. 7(1), pages 39-53, February.
    3. F. Modigliani & H. M. Weingartner, 1958. "Forecasting Uses of Anticipatory Data on Investment and Sales," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 72(1), pages 23-54.
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    5. Pindyck, Robert S, 1982. "Adjustment Costs, Uncertainty, and the Behavior of the Firm," American Economic Review, American Economic Association, vol. 72(3), pages 415-427, June.
    6. Abel, Andrew B, 1985. "A Stochastic Model of Investment, Marginal q and the Market Value of the Firm," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 305-322, June.
    7. Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, vol. 5(2), pages 258-266, October.
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    9. Richard Hartman, 1973. "Adjustment Costs, Price and Wage Uncertainty, and Investment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 40(2), pages 259-267.
    10. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-233, March.
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