Corporate Investments and Learning*

Using age as a proxy for learning within a firm, we show that the investments of firms with younger projects react more to profit realizations. With time, firms learn about their long-term quality, and their investment decisions become less influenced by the random shocks they receive. We also show that the learning process depends on the volatility of the economic environment. In more volatile industries, firms observe more noise and less signal from profit realizations. Their investments are therefore less influenced by profits. These new empirical results are consistent with a Tobin's q framework augmented with Bayesian learning. Copyright 2013, Oxford University Press.