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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)

Additional information is available for the following registered author(s):

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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File URL: http://fmwww.bc.edu/EC-P/WP638.pdf
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Publisher 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
Handle: RePEc:boc:bocoec:638

Note: previously circulated as "Firm Investment and Financial Frictions"
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Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Phone: 617-552-3670
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Related research
Keywords: capital investment; cash flow; financial frictions; uncertainty; CAPM;

Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data

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References listed on IDEAS
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