NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Effect of Uncertainty on Investment: Some Stylized Facts

John V. Leahy, Toni M. Whited

NBER Working Paper No. 4986*
Issued in January 1995
NBER Program(s):   EFG

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, Feb.1996, vol.28, pp.64-83.

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