Working Paper: CEPR ID: DP2982
Authors: Mark Schankerman
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 (value-related) shocks and measurement error in investment revisions. Using panel data for US firms, we find that micro shocks are not the dominant source of risk in investment decisions, and that much of the observed micro variation 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; microshocks
JEL Codes: D24; E22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| revisions of investment plans (G31) | underlying shocks (E32) |
| micro shocks (E71) | investment decisions (G11) |
| aggregate shocks (E10) | investment decisions (G11) |
| capital markets (G10) | liquidity constraints (E41) |