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Investment Under Uncertain Market Conditions

Plutarchos Sakellaris
The Review of Economics and Statistics
Vol. 77, No. 3 (Aug., 1995), pp. 455-469
Published by: The MIT Press
DOI: 10.2307/2109907
Stable URL: http://www.jstor.org/stable/2109907
Page Count: 15
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Investment Under Uncertain Market Conditions
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Abstract

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.

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