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To Buy or Not to Buy? Uncertainty, Irreversibility, and Heterogeneous Investment Dynamics in Italian Company Data

29 Pages Posted: 15 Feb 2006  

Stephen R. Bond

Nuffield College; Institute for Fiscal Studies (IFS)

Domenico Lombardi

CIGI

Date Written: June 2004

Abstract

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

Bond, Stephen R. and Lombardi, Domenico, To Buy or Not to Buy? Uncertainty, Irreversibility, and Heterogeneous Investment Dynamics in Italian Company Data (June 2004). IMF Working Paper, Vol. , pp. 1-29, 2004. Available at SSRN: https://ssrn.com/abstract=878928

Stephen R. Bond (Contact Author)

Nuffield College ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
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+44 1865 278 674 (Phone)
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Institute for Fiscal Studies (IFS)

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United Kingdom
+44 20 7291 4800 (Phone)
+44 20 7323 4780 (Fax)

Domenico Lombardi

CIGI ( email )

67 Erb Street West
Waterloo, Ontario N2L 6C2
Canada

HOME PAGE: http://www.domenicolombardi.org

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