Abstract
We show how microeconomic data on investment plans can be used to study the structure of risk firms face. Revisions of investment plans form a martingale and 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.
| Original language | English |
|---|---|
| Pages (from-to) | 766-785 |
| Number of pages | 20 |
| Journal | Economic Journal |
| Volume | 112 |
| Issue number | 482 |
| DOIs | |
| State | Published - Oct 2002 |
| Externally published | Yes |