Investment Under Uncertainty: Do Firm Boundaries Matter?

51 Pages Posted: 8 Jul 2019

See all articles by Jingyuan Mo

Jingyuan Mo

New York University

Guosong Xu

Rotterdam School of Management, Erasmus University

Date Written: April 30, 2019

Abstract

We examine how firms’ vertical structure affects investment under output price uncertainty. Exploiting a unique industrial organization in the oil exploration and production industry, where certain producers vertically integrate into downstream segments, we find that these integrated producers cut investments significantly more than do standalone producers under exogenous oil price uncertainty shocks. This finding is consistent with a real option model of investment, where a higher level of capital irreversibility amplifies the uncertainty effects on actual investment. We demonstrate that our results cannot be explained by intersegment investment transfer or financial constraints.

Keywords: Vertical integration, Investments, Uncertainty, Asset specificity

JEL Classification: D23, D25, D81

Suggested Citation

Mo, Jingyuan and Xu, Guosong, Investment Under Uncertainty: Do Firm Boundaries Matter? (April 30, 2019). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3381565 or http://dx.doi.org/10.2139/ssrn.3381565

Jingyuan Mo

New York University ( email )

44 West 4th Street
Finance Department
New York, NY NY 10012
United States
212-998-0365 (Phone)

Guosong Xu (Contact Author)

Rotterdam School of Management, Erasmus University ( email )

Rotterdam
Netherlands

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