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The Effect of Uncertainty on Investment: Some Stylized Facts

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John V. Leahy
Toni M. Whited

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Abstract

The theoretical relationship between investment and uncertainty is ambiguous. This paper briefly surveys the insights that theory has to offer and then runs a series of simple tests aimed at evaluating the empirical significance of various theoretical effects. Our results from a panel of U.S. manufacturing firms indicate a negative effect of uncertainty on investment consistent with theories of irreversible investment. We find no evidence for a positive effect via the channel of the convexity of the marginal product of capital, and we find no evidence for the presence of a CAPM-based effect of risk.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4986.

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Date of creation: Jan 1995
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Publication status: published as Journal of Money Credit and Banking, Feb.1996, vol.28, pp.64-83.
Handle: RePEc:nbr:nberwo:4986

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E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment

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