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How does uncertainty affect corporate investment inefficiency? Evidence from Europe

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  • Akron, Sagi
  • Demir, Ender
  • Díez-Esteban, José María
  • García-Gómez, Conrado Diego

Abstract

We conduct a cross-country, firm-based analysis of the impact of uncertainty (World Uncertaınty Index–WUI) on corporate investment inefficiency. The analysis, conducted in the period 2012–2020 across 30 European region countries, demonstrates a negative impact of uncertainty on the absolute value of investment inefficiency. Specifically, there is a negative effect of uncertainty on investment inefficiency in cases of overinvestment, and a positive effect of uncertainty on investment inefficiency in cases of underinvestment. Thus, in both abnormal investment scenarios, uncertainty alleviates the investment inefficiency – namely, uncertainty may optimize investment decisions. The findings are robust to country, industry, and time fixed-effects; GMM; and different legal systems. Moreover, the findings shed important light on the exogenous uncertainty effect on asymmetric information and agency, generating investment decisions.

Suggested Citation

  • Akron, Sagi & Demir, Ender & Díez-Esteban, José María & García-Gómez, Conrado Diego, 2022. "How does uncertainty affect corporate investment inefficiency? Evidence from Europe," Research in International Business and Finance, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:riibaf:v:62:y:2022:i:c:s0275531922001398
    DOI: 10.1016/j.ribaf.2022.101752
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