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.

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Document Object Identifier (DOI): 10.3386/w4986

Published: Journal of Money Credit and Banking, Vol. 28, no. 1, (February 1996), pp. 64-83. citation courtesy of

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