Productivity or unexpected demand shocks: what determines firms' investment and exit decisions?
International Economic Review
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Currently under an indefinite embargo pending publication by Wiley. 24-month embargo to be applied on publication.
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.
Hongsong Zhang also thanks the General Research Fund (project code: 17502714) in Hong Kong for generous financial support.
This is the author accepted manuscript.
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