The Effect of Uncertainty on Investment: Some Stylized Facts

JOURNAL OF MONEY, CREDIT, AND BANKING, Vol 28 No 1, February 1995

Posted: 25 Jul 1998

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

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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.

JEL Classification: E22

Suggested Citation

Leahy, John V. and Whited, Toni M., The Effect of Uncertainty on Investment: Some Stylized Facts. JOURNAL OF MONEY, CREDIT, AND BANKING, Vol 28 No 1, February 1995, Available at SSRN: https://ssrn.com/abstract=6898

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Toni M. Whited

University of Michigan, Department of Economics ( email )

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National Bureau of Economic Research ( email )

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