The Impact of Uncertainty on Investment: Empirical Challenges and a New Estimator

72 Pages Posted: 15 Jun 2021 Last revised: 5 Oct 2021

See all articles by Delong Li

Delong Li

University of Guelph - Gordon S. Lang School of Business and Economics

Yiguo Sun

University of Guelph

Date Written: June 13, 2021

Abstract

This paper proposes a new method for examining the impact on a firm’s investment of uncertainty reflected in its stock-return volatility. We simultaneously address the endogeneity of uncertainty and mismeasurement in Tobin’s q, but earlier empirical work often neglects one of the two issues. Our nonparametric estimates further suggest that the relation between investment and uncertainty is significantly decreasing and strongly concave. This result contrasts with the existing literature that widely adopts linear regressions. Ignoring nonlinearity or measurement error in q can lead to a substantial estimation bias. However, the bias due to the endogeneity of uncertainty is small.

Keywords: endogeneity, investment, measurement error, series approximation, Tobin’s q, uncertainty

JEL Classification: C14, E22, G31

Suggested Citation

Li, Delong and Sun, Yiguo, The Impact of Uncertainty on Investment: Empirical Challenges and a New Estimator (June 13, 2021). Available at SSRN: https://ssrn.com/abstract=3866261 or http://dx.doi.org/10.2139/ssrn.3866261

Delong Li (Contact Author)

University of Guelph - Gordon S. Lang School of Business and Economics ( email )

Guelph, ON, Canada
Guelph

Yiguo Sun

University of Guelph ( email )

Guelph, Ontario
Canada

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