Firms' investment decisions in response to demand and price uncertainty

Catherine Fuss and Philip Vermeulen

No 347, Working Paper Series from European Central Bank

Abstract: We estimate the effect of demand and price uncertainty on firms' investment decisions from a panel of manufacturing firms. Uncertainty measures are derived from firms' subjective qualitative expectations. They are close to their theoretical counterparts, the variances of future demand and price shocks. We find that demand uncertainty depresses planned and realized investment, while price uncertainty is insignificant. This is consistent with the behavior of monopolistic firms with irreversible capital (Caballero, 1991). Further, firms revise their investment plans very little. They may do so in response to new information on sales growth, but not as a result of reduced uncertainty. JEL Classification: D21, D24, D81, D92, C23

Keywords: investment; Panel data; real options; survey data; uncertainty (search for similar items in EconPapers)
Date: 2004-04
Note: 327651
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Firms' investment decisions in response to demand and price uncertainty (2008)
Working Paper: Firms' investment decisions in response to demand and price uncertainty (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2004347

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