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Heterogeneity in the dynamic effects of uncertainty on investment

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  • Sung Je Byun
  • Soojin Jo

Abstract

We examine how aggregate profit uncertainty influences capital investment activities, focusing on heterogeneous responses of firms. We model aggregate profit uncertainty as the conditional standard deviation of a common factor across unforecasted fluctuations in the sales growth of different industries and exploit cross-sectional variations for its estimation. From an investment forecasting model that coherently analyzes firm- or group-specific effects of uncertainty, we find that the direction and the size of investment adjustment vary considerably across firms, with a significant but small negative average impact. Our results highlight the importance of accounting for heterogeneity in the transmission of uncertainty, allowing us to reconcile different views on the effect of uncertainty in the existing literature.

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  • Sung Je Byun & Soojin Jo, 2018. "Heterogeneity in the dynamic effects of uncertainty on investment," Canadian Journal of Economics, Canadian Economics Association, vol. 51(1), pages 127-155, February.
    • Handle: RePEc:cje:issued:v:51:y:2018:i:1:p:127-155
    DOI: 10.1111/caje.12318
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    Cited by:

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    2. Kim, Youngju & Lee, Seohyun & Lim, Hyunjoon, 2023. "Uncertainty, credit and investment: Evidence from firm-bank matched data," Journal of Banking & Finance, Elsevier, vol. 154(C).
    3. Choi, Sangyup & Furceri, Davide & Huang, Yi & Loungani, Prakash, 2018. "Aggregate uncertainty and sectoral productivity growth: The role of credit constraints," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 314-330.
    4. Jung, Seungho & Lee, Jongmin & Lee, Seohyun, 2021. "The impact of geopolitical risk on stock returns: Evidence from inter-Korea geopolitics," MPRA Paper 108006, University Library of Munich, Germany.
    5. Byun, Sung Je, 2016. "The usefulness of cross-sectional dispersion for forecasting aggregate stock price volatility," Journal of Empirical Finance, Elsevier, vol. 36(C), pages 162-180.
    6. Zeng, Ting & Zhao, Wei & Liu, Zhengning, 2022. "Investment response to exchange rate uncertainty: Evidence from Chinese exporters," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 488-505.

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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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