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On the sensitivity of firms' investment to cash flow and uncertainty

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  • Christopher F. Baum
  • Mustafa Caglayan
  • Oleksandr Talavera

Abstract

We investigate the analytical and empirical linkages between cash flow, uncertainty, and firms' capital investment behavior. Our empirical approach constructs measures of own- and market-specific uncertainty from firms' daily stock returns and S&P 500 index returns along with a CAPM-based risk measure. Our results indicate that even in the presence of important firm-specific variables, uncertainty is an important determinant of firms' investment behavior. Depending on the measure of uncertainty used, investment may be stimulated or curtailed by the effects of uncertainty on its own or through its interactions on cash flow. Copyright 2010 Oxford University Press 2009 All rights reserved, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 62 (2010)
Issue (Month): 2 (April)
Pages: 286-306

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Handle: RePEc:oup:oxecpp:v:62:y:2010:i:2:p:286-306

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Citations

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Cited by:
  1. Demir, Firat & Caglayan, Mustafa, 2012. "Firm Productivity, Exchange Rate Movements, Sources of Finance and Export Orientation," MPRA Paper 37397, University Library of Munich, Germany.
  2. Antonakakis, Nikolaos & Chatziantoniou, Ioannis & Filis, George, 2012. "Dynamic Co-movements between Stock Market Returns and Policy Uncertainty," MPRA Paper 42905, University Library of Munich, Germany.
  3. Caglayan, Mustafa & Maioli, Sara & Mateut, Simona, 2012. "Inventories, sales uncertainty, and financial strength," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(9), pages 2512-2521.
  4. Antonakakis, Nikolaos & Chatziantoniou, Ioannis & Filis, George, 2013. "Dynamic co-movements of stock market returns, implied volatility and policy uncertainty," Economics Letters, Elsevier, Elsevier, vol. 120(1), pages 87-92.
  5. Stavros Degiannakis & George Filis & Renatas Kizys, 2013. "Oil price shocks and stock market volatility: evidence from European data," Working Papers, Bank of Greece 161, Bank of Greece.
  6. Mustafa Caglayan & Abdul Rashid, 2013. "The Response of Firms' Leverage to Risk: Evidence from UK Public versus Non-Public ManufacturingFirms," CFI Discussion Papers, Centre for Finance and Investment, Heriot Watt University 1302, Centre for Finance and Investment, Heriot Watt University.
  7. Caglayan, Mustafa & Xu, Bing, 2014. "Allocation effects of uncertainty on resources in Japan," Economics Letters, Elsevier, Elsevier, vol. 122(1), pages 23-26.
  8. Kang, Wensheng & Lee, Kiseok & Ratti, Ronald A., 2013. "Economic Policy Uncertainty and Firm-Level Investment," MPRA Paper 51277, University Library of Munich, Germany.

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