Abstract
We investigate irreversible investment behavior under uncertainty of payoffs using U.S. firm-level panel data. Specifically, we estimate the relationship between the firm’s investment to capital ratio and the interest rate, while controlling for investment opportunities, real option values, uncertainty, and profitability. The results indicate that the investment demand curve is a backward-bending function of the interest rate. That is, at low interest rates an increase in the interest rate leads to additional investment by increasing the cost of postponing investment. Interestingly, the backward-bending shape of investment demand does not hold for the sub-sample of agribusiness firms in our dataset, which are characterized by greater asset fixity. Lastly, firm investment behavior is consistent with the existence of real option values.
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