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

Inoue, Hitoshi and Kani, Masayo and Nakashima, Kiyotaka (2019): The Sensitivity Effect of Uncertainty on Corporate Investment through Internal and External Financing: Evidence on Cautionary Channel from Japanese Manufacturing Firms.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: uncertainty shock; capital investment; R\&D; investment--cash flow sensitivity; 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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