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Abstract

We investigate irreversible investment behavior under uncertainty of payoffs using U.S. firm-level panel data. 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 the investment demand curve is a backward-bending function of the interest rate; at low interest rates, an increase in the interest rate leads to increased investment by increasing the cost of postponing investment. Firm investment behavior is also consistent with real options behavior. The investment behavior of agribusiness firms is significantly different from firms in other sectors.

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