Capital budgeting, uncertainty, and misallocation

Abstract

<p>In canonical models of investment dynamics under uncertainty, “time-to-build” in investment decisions implies that uncertainty negatively impacts firm values and aggregate capital productivity. However, <a href="https://www.sciencedirect.com/topics/economics-econometrics-and-finance/investment-appraisal-techniques" title="Learn more about capital budgeting from ScienceDirect's AI-generated Topic Pages">capital budgeting</a>, which involves ex-ante information acquisition and state-contingent investment decisions, can potentially ameliorate time-to-build frictions. Reduced-form evidence using firm-level data on sales and investment expectations and errors supports both mechanisms. Incorporating <a href="https://www.sciencedirect.com/topics/economics-econometrics-and-finance/investment-appraisal-techniques" title="Learn more about capital budgeting from ScienceDirect's AI-generated Topic Pages">capital budgeting</a> into a standard investment model, our calibrated model reveals that state-contingent investment planning and information acquisition reduce aggregate productivity losses by 41% and 17%, respectively. Moreover, gains from planning accrue primarily to less productive firms, while information acquisition benefits higher productivity ones.</p>