Idiosyncratic and Common Shocks to Investment Decisions

Mark Schankerman
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Mark Schankerman: London School of Economics

Economic Journal, 2002, vol. 112, issue 482, 766-785

Abstract: We show how microeconomic data on investment plans can be used to study the structure of risk firms face. Revisions of investment plans form a martingale and 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 (valuerelated) 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. Copyright Royal Economic Society 2002

Date: 2002
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