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A note on uncertainty and investment across the spectrum of irreversibility

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Author Info
Konstantinos Drakos

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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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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Economics Letters.

Volume (Year): 13 (2006)
Issue (Month): 13 (October)
Pages: 873-876
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Handle: RePEc:taf:apeclt:v:13:y:2006:i:13:p:873-876

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  1. 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. [Downloadable!] (restricted)
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  3. Ciaran Driver & Katsushi Imai & Paul Temple & Giovanni Urga, 2002. "Contrasts between classes of assets in fixed investment panel equations as a way of testing real option theory," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B3-3, International Conferences on Panel Data. [Downloadable!]
  4. 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. [Downloadable!] (restricted)
  5. Goel, Rajeev K. & Ram, Rati, 2001. "Irreversibility of R&D investment and the adverse effect of uncertainty: Evidence from the OECD countries," Economics Letters, Elsevier, vol. 71(2), pages 287-291, May. [Downloadable!] (restricted)
  6. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
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  8. Asplund, Marcus, 1995. "What Fraction of a Capital Investment is Sunk Cost?," Working Paper Series in Economics and Finance 68, Stockholm School of Economics, revised 24 Sep 1999. [Downloadable!]
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  9. Andrew B. Abel & Janice C. Eberly, . "A Unified Model of Investment Under Uncertainty," Rodney L. White Center for Financial Research Working Papers 14-93, Wharton School Rodney L. White Center for Financial Research.
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  10. Bond, Stephen & Meghir, Costas, 1994. "Dynamic Investment Models and the Firm's Financial Policy," Review of Economic Studies, Blackwell Publishing, vol. 61(2), pages 197-222, April. [Downloadable!] (restricted)
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  11. Goel, Rajeev K & Ram, Rati, 1999. "Variations in the Effect of Uncertainty on Different Types of Investment: An Empirical Investigation," Australian Economic Papers, Blackwell Publishing, vol. 38(4), pages 481-92, December. [Downloadable!] (restricted)
  12. Caballero, Ricardo J. & Pindyck, Robert S., 1992. "Uncertainty, investment, and industry evolution," Working papers 3460-92., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
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  13. Elizabeth Webster, 2002. "Intangible and Intellectual Capital: A Review of the Literature," Melbourne Institute Working Paper Series wp2002n10, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
  14. Valerie A. Ramey & Matthew D. Shapiro, 2001. "Displaced Capital: A Study of Aerospace Plant Closings," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 958-992, October. [Downloadable!] (restricted)
  15. Ghosal, Vivek & Loungani, Prakash, 1996. "Product Market Competition and the Impact of Price Uncertainty on Investment: Some Evidence from US Manufacturing Industries," Journal of Industrial Economics, Blackwell Publishing, vol. 44(2), pages 217-28, June. [Downloadable!] (restricted)
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  16. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-85, December. [Downloadable!] (restricted)
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