To Buy or Not to Buy? Uncertainty, Irreversibility, and Heterogeneous Investment Dynamics in Italian Company Data
29 Pages Posted: 15 Feb 2006
Date Written: June 2004
This study tests for the presence of real options effects induced by uncertainty and (partial) irreversibility on fixed capital investment using Italian company data. The approach recognizes that firm-level investment spending may, itself, be aggregated over multiple investment decisions in separate types of capital goods and emphasizes effects of uncertainty on short-run investment dynamics. Using a survey-based measure of uncertainty related to the assessment of managers responsible for the firms` investment plans, the study finds evidence of heterogeneous and nonlinear dynamics pointing to a slower adjustment of investment in response to demand shocks at higher levels of uncertainty. The results also point to an additional source of nonlinearity originating from a convex response of investment to demand shocks.
Keywords: Investment, Real Options, Panel Data
JEL Classification: C23, D8, D92, E22
Suggested Citation: Suggested Citation