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Abstract for:

Revisions of Investment Plans and the Stock Market Rate of Return

Mark Schankerman,  November 1991
Paper No' EI 05: Full paper (pdf)
Paper copy now out of print.
Tags: capital investment plans; revisions; uncertainty; common disturbances; stock market rate of return.

Abstract:

This paper explores the sources of uncertainty that cause firms to revise their capital investment plans and the stock market to revise its valuation of those firms. A simple method is developed to decompose the uncertainty governing revisions in investment plans and the stock market rate of return into micro, sectoral and aggregate components; and to measure the degree of heterogeneity in micro responses to common disturbances. The method is applied to a panel data set of firms in the U.S. economy for the period 1950-1973. The empirical results show that the capital investment decision is governed primarily by idiosyncratic uncertainty, but common disturbances are more important for movements in the stock market rate of return.