Investment decisions in manufacturing: assessing the effects of real oil prices and their uncertainty

Authors

  • Konstantinos Drakos,

    1. Department of Accounting and Finance, and Department of Economics, Athens University of Economics and Business, Greece
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  • Panagiotis Th. Konstantinou

    Corresponding author
    1. Department of Economics and Finance, Brunel University, Uxbridge, UK
    • Department of Economics, University of Macedonia, Thessaloniki, Greece
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Panagiotis Th. Konstantinou, Department of Economics and Finance, Brunel University, Uxbridge UB8 3PH, UK. E-mail: Panagiotis.Konstantinou@brunel.ac.uk

SUMMARY

We investigate the effects of real oil prices and their uncertainty on investment decisions. Making use of plant-level data, we estimate dynamic, discrete-choice models that allow modeling investment inaction, under different assumptions related to initial conditions and unobserved heterogeneity. We find that increases in real oil price changes and in real oil price uncertainty significantly reduce the likelihood of investment action, in line with the predictions of irreversible investment theory. We also document that investment decisions exhibit strong, pure state dependence and are also significantly affected by initial conditions. Copyright © 2012 John Wiley & Sons, Ltd.

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