The Differential Impact of Uncertainty on Investment in Small and Large Businesses

24 Pages Posted: 27 Jul 2000

See all articles by Vivek Ghosal

Vivek Ghosal

Rensselaer Polytechnic Institute; Center for Economic Studies and Ifo Institute for Economic Research (CESifo)

Prakash Loungani

International Monetary Fund (IMF)

Abstract

We study the impact of profit uncertainty on investment and whether or not this response is different in industries that are dominated by small firms versus those that are dominated by relatively larger firms. Our key findings are that the sign of the investment-uncertainty relationship is negative, and that the quantitative negative impact is substantially greater in industries dominated by small firms. These results are robust to accounting for potential endogeneity of the uncertainty measure, alternate procedures for measuring uncertainty, and alternate ways of segmenting industries into small-and-large firm groups.

Keywords: uncertainty, investment, irreversibility, sunk costs, financing constraints, small businesses

JEL Classification: D80, D24, E22, G10, L11

Suggested Citation

Ghosal, Vivek and Loungani, Prakash, The Differential Impact of Uncertainty on Investment in Small and Large Businesses. Available at SSRN: https://ssrn.com/abstract=236097 or http://dx.doi.org/10.2139/ssrn.236097

Vivek Ghosal (Contact Author)

Rensselaer Polytechnic Institute ( email )

110 8th Street
Troy, NY 12180
United States
518-276-3868 (Phone)

HOME PAGE: http://https://faculty.rpi.edu/vivek-ghosal

Center for Economic Studies and Ifo Institute for Economic Research (CESifo)

Poschinger Str. 5
Munich
Germany

HOME PAGE: http://www.cesifo.de

Prakash Loungani

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7043 (Phone)
202-623-4740 (Fax)

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