Productivity or unexpected demand shocks: what determines firms' investment and exit decisions?
Kumar, P; Zhang, H
Date: 2 October 2018
Journal
International Economic Review
Publisher
Wiley
Publisher DOI
Abstract
We investigate the roles played by unexpected demand shocks, besides productivity, on firms’
capital investment and exit decisions. We propose a practical approach to recover unexpected
firm-level demand shocks using inventory data. The recognition of demand shocks and inventory
also improves the productivity estimation. The empirical ...
We investigate the roles played by unexpected demand shocks, besides productivity, on firms’
capital investment and exit decisions. We propose a practical approach to recover unexpected
firm-level demand shocks using inventory data. The recognition of demand shocks and inventory
also improves the productivity estimation. The empirical results indicate that while productivity
and demand shocks are both significant factors determining firm behavior, the former is more
dominant for investment decision and the latter is more salient for firm exit. These findings
confirm that unexpected demand shocks, besides persistent productivity, are important factors
when analyzing capital investment and firm exit decisions.
Economics
Faculty of Environment, Science and Economy
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