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Investment Under Uncertain Market Conditions
The Review of Economics and Statistics
Vol. 77, No. 3 (Aug., 1995), pp. 455-469
Published by: The MIT Press
Stable URL: http://www.jstor.org/stable/2109907
Page Count: 15
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This paper studies the responsiveness of firm investment to shocks in the input factor and output prices (the market conditions) by using stock market information on excess returns. The q theory of investment is modified to allow for heterogeneous capital, ex post inflexible technology, and irreversible investment. A structural model linking the excess returns to a firm's equity to the firm's investment history and the evolution of the market conditions is estimated using a panel of U.S. manufacturing firms. The estimates of the cost of adjusting the capital stock are economically sensible. They imply a high degree of sensitivity of investment to fundamental variables that affect the profitability of capital such as the market conditions and the purchase price of capital.
The Review of Economics and Statistics © 1995 The MIT Press