We examine how aggregate profit uncertainty influences capital investment activities, focusing on heterogeneous responses of firms. We model aggregate profit uncertainty as the conditional standard deviation of a common factor across unforecasted fluctuations in the sales growth of different industries and exploit cross-sectional variations for its estimation. From an investment forecasting model that coherently analyzes firm- or group-specific effects of uncertainty, we find that the direction and the size of investment adjustment vary considerably across firms, with a significant but small negative average impact. Our results highlight the importance of accounting for heterogeneity in the transmission of uncertainty, allowing us to reconcile different views on the effect of uncertainty in the existing literature.
Bibliographical notePublisher Copyright:
© 2018 Canadian Economics Association
All Science Journal Classification (ASJC) codes
- Economics and Econometrics