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On the Sensitivity of Firms' Investment to Cash Flow and Uncertainty

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Author Info

  • Christopher F. Baum

    ()
    (Boston College
    DIW Berlin)

  • Mustafa Caglayan

    (University of Sheffield)

  • Oleksandr Talavera

    ()
    (Aberdeen Business School)

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.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 638.

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Length: 24 pages
Date of creation: 15 Feb 2006
Date of revision: 26 Apr 2008
Publication status: published, Oxford Economic Papers, 62, 286-306, 2010
Handle: RePEc:boc:bocoec:638

Note: previously circulated as "Firm Investment and Financial Frictions"
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Keywords: capital investment; cash flow; financial frictions; uncertainty; CAPM;

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References

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Citations

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Cited by:
  1. Stavros Degiannakis & George Filis & Renatas Kizys, 2013. "Oil price shocks and stock market volatility: evidence from European data," Working Papers 161, Bank of Greece.
  2. Kang, Wensheng & Lee, Kiseok & Ratti, Ronald A., 2013. "Economic Policy Uncertainty and Firm-Level Investment," MPRA Paper 51277, University Library of Munich, Germany.
  3. 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.
  4. Caglayan, Mustafa & Maioli, Sara & Mateut, Simona, 2012. "Inventories, sales uncertainty, and financial strength," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2512-2521.
  5. Mustafa Caglayan & Abdul Rashid, 2013. "The Response of Firms' Leverage to Risk: Evidence from UK Public versus Non-Public ManufacturingFirms," CFI Discussion Papers 1302, Centre for Finance and Investment, Heriot Watt University.
  6. Caglayan, Mustafa & Xu, Bing, 2014. "Allocation effects of uncertainty on resources in Japan," Economics Letters, Elsevier, vol. 122(1), pages 23-26.
  7. Caglayan, Mustafa & Demir, Firat, 2014. "Firm Productivity, Exchange Rate Movements, Sources of Finance, and Export Orientation," World Development, Elsevier, vol. 54(C), pages 204-219.
  8. Antonakakis, Nikolaos & Chatziantoniou, Ioannis & Filis, George, 2013. "Dynamic co-movements of stock market returns, implied volatility and policy uncertainty," Economics Letters, Elsevier, vol. 120(1), pages 87-92.

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