The Effect of Uncertainty on Investment: Some Stylized Facts
NBER Working Paper No. 4986
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. Our results from a panel of U.S. manufacturing firms indicate a negative effect of uncertainty on investment consistent with theories of irreversible investment. We find no evidence for a positive effect via the channel of the convexity of the marginal product of capital, and we find no evidence for the presence of a CAPM-based effect of risk.
Published: Journal of Money Credit and Banking, Vol. 28, no. 1, (February 1996), pp. 64-83.