The Persistent Effects of Adverse Shocks to Investment

<jats:p>We use a large panel survey of German manufacturing firms spanning five decades of quantitative investment plans and realizations to study the persistence of investment dynamics. We proxy adverse investment shocks with large downward revisions of firms’ investment plans. Even ten years after a 50% downward revision, annual investment remains about 15% lower. Combining the survey with balance-sheet data and survey-based shock proxies, we show that financial frictions are only part of the explanation. Persistent investment declines are also closely linked to long-lived demand shocks, suggesting that they often reflect firms’ deliberate adjustment to weaker fundamentals.</jats:p>