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A note on uncertainty and investment across the spectrum of irreversibility

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  • Konstantinos Drakos

Abstract

There is a lack of consensus regarding the sign of the uncertainty-investment relationship, with a strand of the literature suggesting a positive sign, and the Real Options Theory (ROT) advocating a negative relationship. As a way of testing the ROT, this paper empirically investigates its main prediction that the negative effect of uncertainty on investment is an increasing function of the degree of irreversibility. Empirical results provide support for the ROT since uncertainty is found to exert a higher impact on investment spending across the irreversibility spectrum.

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File URL: http://www.informaworld.com/openurl?genre=article&doi=10.1080/13504850500425451&magic=repec&7C&7C8674ECAB8BB840C6AD35DC6213A474B5
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 13 (2006)
Issue (Month): 13 ()
Pages: 873-876

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Handle: RePEc:taf:apeclt:v:13:y:2006:i:13:p:873-876

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  15. Driver, Ciaran & Temple, Paul & Urga, Giovanni, 2006. "Contrasts Between Types of Assets in Fixed Investment Equations as a Way of Testing Real Options Theory," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 432-443, October.
  16. Henley, Andrew & Carruth, Alan & Dickerson, Andy, 2003. "Industry-wide versus firm-specific uncertainty and investment: British company panel data evidence," Economics Letters, Elsevier, vol. 78(1), pages 87-92, January.
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