The Effect of Uncertainty on Investment: Some Stylized Facts
John V. Leahy
New York University (NYU) - Department of Economics; National Bureau of Economic Research (NBER)
Toni M. Whited
University of Rochester - Simon Graduate School of Business
JOURNAL OF MONEY, CREDIT, AND BANKING, Vol 28 No 1, February 1995
The theoretical relationship between investment and uncertainty is ambiguous. This paper briefly surveys the insights that theory has to offer and then runs a series of simple tests aimed at evaluating the empirical significance of various theoretical effects. Our results from a panel of U.S. manufacturing firms indicate a negative effect of uncertainty on investment consistent with theories of irreversible investment. We find no evidence for a positive effect via the channel of the convexity of the marginal product of capital, and we find no evidence for the presence of a CAPM-based effect of risk.
JEL Classification: E22Accepted Paper Series
Date posted: July 25, 1998
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