The Sensitivity Effect of Uncertainty on Corporate Investment through Internal and External Financing: Evidence on Cautionary Channel from Japanese Manufacturing Firms

47 Pages Posted: 16 Jan 2020 Last revised: 30 Apr 2020

See all articles by Hitoshi Inoue

Hitoshi Inoue

Australian National University (ANU); Sapporo Gakuin University

Masayo Kani

Tezukayama University

Kiyotaka Nakashima

Konan University, Faculty of Economics

Date Written: May 1, 2020

Abstract

Using firm-level data on the Japanese manufacturing industry, this paper studies the causal impact of uncertainty on the dynamic relation between corporate investment and financing conditions. It demonstrates that the cautionary effect that makes actual corporate investment decisions indifferent to the firm’s financing conditions increases in higher uncertainty irrespective of the type of corporate investment—capital investment and R&D—and is more pronounced in firms with less cash holdings. This result remains even in the weak and invalid instrument robust inference.

Keywords: uncertainty shock; capital investment; R&D; sensitivity to internal and external financing; system GMM; weak and invalid instruments

JEL Classification: G01, G31, G32

Suggested Citation

Inoue, Hitoshi and Kani, Masayo and Nakashima, Kiyotaka, The Sensitivity Effect of Uncertainty on Corporate Investment through Internal and External Financing: Evidence on Cautionary Channel from Japanese Manufacturing Firms (May 1, 2020). Available at SSRN: https://ssrn.com/abstract=3510011 or http://dx.doi.org/10.2139/ssrn.3510011

Hitoshi Inoue

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Sapporo Gakuin University ( email )

11 Bunkyo-dai
Ebetu-shi, Hokkaido 069-8555
Japan

Masayo Kani (Contact Author)

Tezukayama University ( email )

7-1-1 Tezukayama
Nara, 631-8051
Japan

Kiyotaka Nakashima

Konan University, Faculty of Economics ( email )

8-9-1 Okamoto, Higashinada
Kobe, Hyogo 658-8501
Japan

HOME PAGE: http://kiyotaka.sakura.ne.jp/

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