Idiosyncratic and common shocks to investment decisions

Mark Schankerman

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 (valuerelated) shocks and measurement error in investment revisions. Using panel data for US firms, we find that microshocks are not the dominant source of risk in investment decisions, and that much of the observed microvariation 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: Aggregate shocks; heterogeneity; investment and microshocks. JEL Classification codes: D24; E22 (search for similar items in EconPapers)
JEL-codes: D24 E22 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2001-09
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:176

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