Productivity or unexpected demand shocks: what determines firms' investment and exit decisions?
International Economic Review
© (2018) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
Reason for embargo
Under embargo until 02 October 2020 in compliance with publisher policy.
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. The final version is available from Wiley via the DOI in this record.
Vol. 60 (1), pp. 1-25.