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PRODUCTIVITY OR UNEXPECTED DEMAND SHOCKS: WHAT DETERMINES FIRMS' INVESTMENT AND EXIT DECISIONS?
Author(s) -
Kumar Pradeep,
Zhang Hongsong
Publication year - 2019
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12354
Subject(s) - demand shock , productivity , economics , investment (military) , monetary economics , salient , capital (architecture) , microeconomics , investment decisions , labour economics , production (economics) , macroeconomics , history , archaeology , artificial intelligence , politics , political science , law , computer science
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 although 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.