Corporate Decision-Making under Uncertainty: Review and Future Research Directions
60 Pages Posted:
Date Written: November 15, 2022
Uncertainty over future business conditions lies at the heart of corporate decision-making. Uncertainty can arise from a myriad of sources and is often difficult to measure. We present a simple conceptual framework showing how several key corporate decisions are affected by uncertainty. We also highlight recent advances in the measurement of uncertainty, distinguishing between approaches that gauge aggregate uncertainty and those that capture different dimensions of firm-specific uncertainty. These approaches incorporate information obtained from market prices, machine learning techniques, surveys, and more. We then review the growing body of empirical work that studies the role played by uncertainty in shaping outcomes ranging across corporate investment, asset base composition, innovation, liquidity management, payouts, and mergers. Our review outlines several opportunities for future research.
Keywords: Uncertainty, irreversibility, real options, investment, disinvestment, innovation
JEL Classification: G30, G31, G32, D81
Suggested Citation: Suggested Citation