Capital budgeting, uncertainty, and misallocation

Ben Charoenwong, Yosuke Kimura, Alan Kwan and Eugene Tan

Journal of Financial Economics, 2024, vol. 153, issue C

Abstract: In canonical models of investment dynamics under uncertainty, “time-to-build” in investment decisions implies that uncertainty negatively impacts firm values and aggregate capital productivity. However, capital budgeting, which involves ex-ante information acquisition and state-contingent investment decisions, can potentially ameliorate time-to-build frictions. Reduced-form evidence using firm-level data on sales and investment expectations and errors supports both mechanisms. Incorporating capital budgeting into a standard investment model, our calibrated model reveals that state-contingent investment planning and information acquisition reduce aggregate productivity losses by 41% and 17%, respectively. Moreover, gains from planning accrue primarily to less productive firms, while information acquisition benefits higher productivity ones.

Keywords: Corporate investment; Expectations; Formation; Intangible capital; Information; Learning (search for similar items in EconPapers)
JEL-codes: E22 G31 O16 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:153:y:2024:i:c:s0304405x24000023

DOI: 10.1016/j.jfineco.2024.103779

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