Investment under Uncertainty and Financial Market Development: A q-Theory Approach
AbstractThe paper presents a theoretical model of investment under uncertainty, incorporating the financial sector development as a key factor for determining the effect and level of uncertainty. As a difference with previous works, the model is developed using a Tobin's q approach, analyzing the effects from an equilibrium perspective -comparative static-. The model assumes partial reversibility in investment decisions and a representative firm participating in a non-competitive market. Uncertainty is associated to the market conditions faced by the firm in the commercialization of the products or services that offers. From the model we conclude that uncertainty affects negatively the capital accumulation process. Assuming an initial equilibrium condition, as uncertainty increases, a higher expected growth on market conditions will be required in order to remain in an equilibrium state. If the requirement is not satisfied, as should occur in the short run, q decreases and, as a consequence, the stock of capital. The dynamic on q makes the firm gradually converge to a pseudo equilibrium point, where it stays while there is no change in uncertainty about market conditions, increase in the expected growth of market conditions is not verified or the financial market does not become more developed. Financial market deepness has important effects on economic agents ability to diversify risk, accuracy in firms' valuation and economic volatility. Then, a more developed financial market conducts the economy to an improved environment; less uncertainty is perceived by investors and its effect over decision making is reduced. As a result, investment increases, strengthening the economic growth capacity.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 17.
Date of creation: Oct 1997
Date of revision:
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Farook, Sayd & Hassan, M. Kabir & Clinch, Gregory, 2012. "Profit distribution management by Islamic banks: An empirical investigation," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(3), pages 333-347.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio Sepulveda).
If references are entirely missing, you can add them using this form.