The Effect of Uncertainty on Investment: Some Stylized Facts
Working Paper 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.
Journal of Money Credit and Banking, Vol. 28, no. 1, (February 1996), pp. 64-83. citation courtesy of