Firm-level Uncertainty and Frictions: Implications for Capital and Financial Decisions in the US

Danilo Stojanovic and Veljko Bojovic

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: This paper examines how profit volatility has influenced firms’ decisions over the past four decades. Using Compustat data, we document that: (1) high-investing firms cut their investment rate more sharply than other firms, implying that extensive margin investment decisions - whether to invest in new projects or not - are important for the uncertainty effects; (2) the interaction between firms’ financial and real conditions amplifies the negative impact of increased uncertainty on the investment rates. We also develop and calibrate a heterogeneous-firm model that incorporates both real and financial costs. In the model, higher capital adjustment costs increase the investment inaction rate by 31%, while higher financial costs reduce the investment spike rate by 46%. Incorporating irreversible capital into the collateral constraint reduces firms’ debt capacity, leading to an increase in the investment inaction rate, cash holdings, and net dividends.

Keywords: Capital Investment; Adjustment Costs; Extensive Margin (search for similar items in EconPapers)
JEL-codes: C31 E22 G31 (search for similar items in EconPapers)
Date: 2025-04
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Persistent link: https://EconPapers.repec.org/RePEc:cer:papers:wp793

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