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A note on uncertainty and investment across the spectrum of irreversibility

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  • Konstantinos Drakos

Abstract

There is a lack of consensus regarding the sign of the uncertainty-investment relationship, with a strand of the literature suggesting a positive sign, and the Real Options Theory (ROT) advocating a negative relationship. As a way of testing the ROT, this paper empirically investigates its main prediction that the negative effect of uncertainty on investment is an increasing function of the degree of irreversibility. Empirical results provide support for the ROT since uncertainty is found to exert a higher impact on investment spending across the irreversibility spectrum.

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  • Konstantinos Drakos, 2006. "A note on uncertainty and investment across the spectrum of irreversibility," Applied Economics Letters, Taylor & Francis Journals, vol. 13(13), pages 873-876.
  • Handle: RePEc:taf:apeclt:v:13:y:2006:i:13:p:873-876
    DOI: 10.1080/13504850500425451
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    References listed on IDEAS

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    1. Andrew B. Abel & Avinash K. Dixit & Janice B. Eberly & Robert S. Pindyck, "undated". "Options, the Value of Capital, and Investment," Rodney L. White Center for Financial Research Working Papers 15-95, Wharton School Rodney L. White Center for Financial Research.
    2. Del Boca, Alessandra & Galeotti, Marzio & Rota, Paola, 2008. "Non-convexities in the adjustment of different capital inputs: A firm-level investigation," European Economic Review, Elsevier, vol. 52(2), pages 315-337, February.
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    5. Ghosal, Vivek & Loungani, Prakash, 1996. "Product Market Competition and the Impact of Price Uncertainty on Investment: Some Evidence from US Manufacturing Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 217-228, June.
    6. Henley, Andrew & Carruth, Alan & Dickerson, Andy, 2003. "Industry-wide versus firm-specific uncertainty and investment: British company panel data evidence," Economics Letters, Elsevier, vol. 78(1), pages 87-92, January.
    7. Ciaran Driver & Katsushi Imai & Paul Temple & Giovanni Urga, 2002. "Contrasts between classes of assets in fixed investment panel equations as a way of testing real option theory," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B3-3, International Conferences on Panel Data.
    8. Goel, Rajeev K. & Ram, Rati, 2001. "Irreversibility of R&D investment and the adverse effect of uncertainty: Evidence from the OECD countries," Economics Letters, Elsevier, vol. 71(2), pages 287-291, May.
    9. Goel, Rajeev K & Ram, Rati, 1999. "Variations in the Effect of Uncertainty on Different Types of Investment: An Empirical Investigation," Australian Economic Papers, Wiley Blackwell, vol. 38(4), pages 481-492, December.
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    15. Elizabeth Webster, 2002. "Intangible and Intellectual Capital: A Review of the Literature," Melbourne Institute Working Paper Series wp2002n10, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    16. Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1996. "Options, the Value of Capital, and Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 753-777.
    17. Vivek Ghosal & Prakash Loungani, 2000. "The Differential Impact of Uncertainty on Investment in Small and Large Businesses," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 338-343, May.
    18. Driver, Ciaran & Temple, Paul & Urga, Giovanni, 2006. "Contrasts Between Types of Assets in Fixed Investment Equations as a Way of Testing Real Options Theory," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 432-443, October.
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    Cited by:

    1. Konstantinos Drakos, 2012. "Extent and intensity of investment with multiple capital goods," Applied Economics, Taylor & Francis Journals, vol. 44(22), pages 2799-2810, August.

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