The Effect of Uncertainty on Investment: Some Stylized Facts

Leahy, John V.; Whited, Toni M.

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The Effect of Uncertainty on Investment: Some Stylized Facts

NBER Working Paper No. w4986

31 Pages Posted: 14 Jul 2000 Last revised: 18 Aug 2022

See all articles by John V. Leahy

John V. Leahy

New York University (NYU) - Department of Economics; National Bureau of Economic Research (NBER)

Toni M. Whited

University of Michigan, Department of Economics; National Bureau of Economic Research

There are 2 versions of this paper

Date Written: January 1995

Abstract

The theoretical relationship between investment and uncertainty is ambiguous. This paper briefly surveys the insights that theory has to offer and then runs a series of simple tests aimed at evaluating the empirical significance of various theoretical effects. Our results from a panel of U.S. manufacturing firms indicate a negative effect of uncertainty on investment consistent with theories of irreversible investment. We find no evidence for a positive effect via the channel of the convexity of the marginal product of capital, and we find no evidence for the presence of a CAPM-based effect of risk.

Suggested Citation: Suggested Citation

Leahy, John V. and Whited, Toni M., The Effect of Uncertainty on Investment: Some Stylized Facts (January 1995). NBER Working Paper No. w4986, Available at SSRN: https://ssrn.com/abstract=226584