Corporate Investments and Learning

Using firm age as a proxy for the learning process within a firm, we show that the investments of young firms react more aggressively to profit realizations than the investments of mature firms. With time, firms learn about their long-term quality and their investment decisions become less influenced by the random shocks they receive. We also show that the learning process depends on the volatility of the economic environment. In more volatile industries, firms observe more noise and less signal from the profit realizations. Their investments are therefore less influenced by profits. These new empirical results are shown to be consistent with a Tobin’s q framework augmented with Bayesian learning. JEL classifications: G31, G32