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Idiosyncratic and common shocks to investment decisions

Schankerman, Mark (2001) Idiosyncratic and common shocks to investment decisions. Discussion Paper No. 2982. Centre for Economic Policy Research, London School of Economics and Political Science, London, UK.

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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.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.lse.ac.uk/people/m.schankerman@lse.ac.u...
Additional Information: Copyright © 2001 Mark Schankerman. LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website. Also published in Economic Journal, copyright © 2002 Blackwell Publishing.
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Sets: Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: Discussion Paper No. 2982
Date Deposited: 06 Jul 2006
URL: http://eprints.lse.ac.uk/176/

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