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The Effect of Uncertainty on Investment: Some Stylized Facts

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  • Leahy, John V
  • Whited, Toni M

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. The authors' results from a panel of U.S. manufacturing firms indicate a negative effect of uncertainty on investment consistent with theories of irreversible investment. They find no evidence for a positive effect via the channel of the convexity of the marginal product of capital and find no evidence for the presence of a CAPM-based effect of risk. Copyright 1996 by Ohio State University Press.

Suggested Citation

  • Leahy, John V & Whited, Toni M, 1996. "The Effect of Uncertainty on Investment: Some Stylized Facts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 64-83, February.
  • Handle: RePEc:mcb:jmoncb:v:28:y:1996:i:1:p:64-83
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    JEL classification:

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

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