The Dynamic Effect of Uncertainty on Corporate Investment through Internal and External Financing

Inoue, Hitoshi and Kani, Masayo and Nakashima, Kiyotaka (2019): The Dynamic Effect of Uncertainty on Corporate Investment through Internal and External Financing.

Abstract

Using firm-level data on the Japanese manufacturing industry, this study identifies the causal effect of uncertainty on the dynamic relation between corporate investment and financing conditions. It demonstrates that the cautionary effect is increasingly dominant under high uncertainty irrespective of the type of corporate investment—capital investment and R&D—and that this result remains even in the weak instrument robust inference. Hence, the dominance of the cautionary effect over the financing constraint effect makes actual corporate investment decisions under high uncertainty indifferent to the firm’s financing conditions.

• Item Type: MPRA Paper
• Language: English
• Keywords: uncertainty shock; capital investment; R&D; sensitivity to internal and external financing; system GMM; weak instruments
• Subjects: G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

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