Capital Budgeting, Uncertainty, and Misallocation

We use data on firms' expectations and planned capital expenditures to show planned investment (i) is partially flexible to real-time shocks, and (ii) is a strong predictor of actual investment, with higher statistical importance than expected sales. To explain these facts, we develop an investment model with endogenous learning and partially flexible investment plans. Our calibrated model shows managers actively use both strategies, but prefer better information over ex-post adjustments. Moreover, our results suggest that capital misallocation from uncertainty is much smaller than in a standard firm dynamics model. Finally, our model predicts counter-cyclical uncertainty via endogenous fluctuations in returns to learning.