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Aggregate Shocks and Investment Dynamics: Lessons From the Micro Data

Paper Session

Friday, Jan. 5, 2018 10:15 AM - 12:15 PM

Loews Philadelphia, Parlor 2
Hosted By: International Society for Inventory Research
  • Chair: Felipe Schwartzman, Federal Reserve Bank of Richmond

Short and Long Run Uncertainty

Jose Maria Barrero
,
Stanford University
Nicholas Bloom
,
Stanford University
Ian Wright
,
Goldman Sachs

Abstract

Uncertainty appears to have both a short-run and a long-run component, which we measure using firm and macro implied volatility data from options of 30 days to 5 years duration. We ask what may be driving uncertainty over these different time horizons, finding that oil price volatility is particularly important for short-run uncertainty, policy uncertainty and interest rate volatility are particularly important for long-run uncertainty, while currency volatility and CEO turnover appear to equally impact short- and long-run uncertainty. Examining a panel of over 4,000 firms from 1996 to 2016 we find that R&D is relatively more sensitive to long-run uncertainty than investment, and in turn investment is relatively more sensitive to long-run uncertainty than hiring. In a simulation model we investigate the channels underlying this pecking-order response to long-run uncertainty, and show that lower depreciation rates and higher adjustment costs lead R&D and investment to be more sensitive to longer-run uncertainty than hiring. Collectively, these results suggest that recent events that have raised long-run policy uncertainty may be particularly damaging to growth by reducing R&D and investment.

Small and Large Firms Over the Business Cycle

Nicolas Crouzet
,
Northwestern University
Neil Mehrotra
,
Brown University

Abstract

Drawing from new, confidential data on income statements and balance sheets of US manufacturing firms, we provide evidence on the relationship between size, cyclicality and financial frictions. First, while sales and investment of smaller firms tend to fluctuate more over the business cycle, the difference is too small to have an impact on aggregates — especially given the high and rising degree of skewness of the firm size distribution. Second, the size effect remains unchanged when directly conditioning on firm-level proxies for financial strength; moreover, while there is a size effect for sales and investment, there is none for measures of external financing. This evidence suggests that the relative behavior of small firms may not be informative about the role of financing frictions in amplifying business cycles.

Kinky Tax Policy and Abnormal Investment Behavior

Eric Zwick
,
University of Chicago
Qiping Xu
,
University of Notre Dame

Abstract

This paper documents tax-minimizing investment, in which firms accelerate capital purchases near fiscal year-end to reduce taxes. Between 1984 and 2013, average investment in the fourth fiscal quarter (Q4) is 37% higher than the average of the first three fiscal quarters. Q4 investment spikes also occur internationally. We use research designs based on variation in firm tax positions, the 1986 Tax Reform Act, and international tax changes to show tax minimization causes spikes. Spikes are larger when firms face financial constraints or higher option values of waiting until year-end. Models without a purchase-year, tax-minimization motive are unlikely to fit the data.
Discussant(s)
Ruediger Bachmann
,
University of Notre Dame
Francisco Buera
,
Washington University-St. Louis
Kurt Mitman
,
Stockholm University
Thomas Winberry
,
University of Chicago
JEL Classifications
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
  • E3 - Prices, Business Fluctuations, and Cycles