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On the Sensitivity of Firms' Investment to Cash Flow and Uncertainty

  • Christopher F. Baum

    ()

    (Boston College
    DIW Berlin)

  • Mustafa Caglayan

    (University of Sheffield)

  • Oleksandr Talavera

    ()

    (Aberdeen Business School)

We investigate the analytical and empirical linkages between cash flow, uncertainty and firms' capital investment behavior. Our empirical approach constructs measures of own- and market-specific uncertainty from firms' daily stock returns and S&P 500 index returns along with a CAPM-based risk measure. Our results indicate that even in the presence of important firm-specific variables, uncertainty is an important determinant of firms' investment behavior. Depending on the measure of uncertainty used, investment may be stimulated or curtailed by the effects of uncertainty on its own or through its interactions on cash flow.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 638.

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Length: 24 pages
Date of creation: 15 Feb 2006
Date of revision: 26 Apr 2008
Publication status: published, Oxford Economic Papers, 62, 286-306, 2010
Handle: RePEc:boc:bocoec:638
Note: previously circulated as "Firm Investment and Financial Frictions"
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