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How Asset Irreversibility Influences The Investment‐Uncertainty Relationship

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  • Catharina Schauer (neé Klepsch)

Abstract

This paper examines how uncertainty affects firms' investments for varying degrees of asset irreversibility (i.e., the wedge between purchase price and liquidation value of an asset). To identify more or less irreversible capital goods, we exploit unique survey data on German manufacturing firms over the sample period 2004 to 2012 in which managers provide information on investments' purpose (capacity expansion, replacement, restructuring, rationalization, and other). Our results indicate that only investments into the most irreversible capital goods (capacity expansion) will decrease if uncertainty rises. We also find support for other channels, such as the financial friction or the market power channel, to explain the investment‐uncertainty relationship.

Suggested Citation

  • Catharina Schauer (neé Klepsch), 2019. "How Asset Irreversibility Influences The Investment‐Uncertainty Relationship," Bulletin of Economic Research, Wiley Blackwell, vol. 71(3), pages 283-306, July.
    • Handle: RePEc:bla:buecrs:v:71:y:2019:i:3:p:283-306
    DOI: 10.1111/boer.12164
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    Cited by:

    1. Yuchen Lin & Daxin Dong & Jiaxin Wang, 2021. "The Negative Impact of Uncertainty on R&D Investment: International Evidence," Sustainability, MDPI, vol. 13(5), pages 1-21, March.
    2. Bin Wang & Samia Khalid & Hamid Mahmood, 2024. "R&D Spending and Economic Policy Uncertainty in Asian Countries: an Advanced Panel Data Estimation Study," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(1), pages 4710-4729, March.
    3. Kaido Kepp & Kadri Männasoo, 2021. "Investment irreversibility and cyclical adversity: Implications for the financial performance of European manufacturing companies," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(7), pages 1665-1678, October.

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