Uncertainty and Exit Decisions: Evidence from Plant-Level Data
61 Pages Posted: 9 Oct 2015 Last revised: 7 Nov 2018
Date Written: October 30, 2018
Theory suggests that uncertainty can play an important role in determining firms’ decisions to shut down operations. In this paper, I provide evidence that input-price uncertainty leads to significant and persistent reductions in plant exits in the context of Brazilian manufacturing. I analyze this effect by combining differences in plants’ exposure to import price uncertainty within a same industry and region with shocks to exchange rate uncertainty, and monthly data on the timing of plant closures. The results consider both a natural experiment that leads to firm-specific changes in the exchange rate uncertainty faced by importers and broader aggregate shocks to exchange rate uncertainty. The evidence supports the view that these results capture real-options effects where firms delay market exit decisions that are costly to reverse.
Keywords: Uncertainty, Exit Decisions, Plant Shutdowns, Real Options
JEL Classification: D40, D81, G32, G34, D21
Suggested Citation: Suggested Citation