A Quantile Model of Firm Investment

ABSTRACT Are firms risk averse? We propose a dynamic model of firm investment under uncertainty that captures firms' risk attitudes through quantile preferences. The firm maximizes its present value, defined as current profits and investment plus the discounted value of the ‐quantile of its value next period. The model implies that the firm's investment policy equates the marginal cost of capital with the ‐quantile of the discounted present value of future marginal profits. Therefore, investment depends directly on the firm's risk attitude. Empirical estimations using the Euler equation derived from the quantile investment model reveal evidence of downside risk aversion.