Idiosyncratic and Common Shocks to Investment Decisions

Mark Schankerman

No 2982, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper shows how microeconomic data on investment plans can be used to study the structure of risk faced by firms. Revisions of investment plans form a martingale, and thus 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 (value-related) 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. Firms are able to diversify most idiosyncratic investment risk, and they do not appear to be liquidity-constrained.

Keywords: investment; Micro shocks; Aggregate shocks; Heterogeneity (search for similar items in EconPapers)
JEL-codes: D24 E22 (search for similar items in EconPapers)
Date: 2001-09
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Citations: View citations in EconPapers (2)

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