Investment and uncertainty: Are large firms different from small ones?

Abstract

We examine the effect of uncertainty on investment by employing panel data from 25000Greek firms' balance sheets. The sample period allows us to consider turbulent and tranquil periods. Uncertainty is proxied by a dynamic factor model. We explore the heterogeneity among the sectors within a panel quantile estimation framework. This allows us to differentiate between relatively low and relatively high values of investment. We reveal the different responses between and within sectors. At aggregate level the effect of uncertainty is negative. This negative effect increases substantially when the firm's investment rate is relatively high. The negative impact of uncertainty is more profound for smaller firms.

Cashflow Volatility, Corporate Investments and Value of Nonfinancial Firms Listed in Kenya

“…Corporate investment is an important firm characteristic that has an enormous influence on the way the firm is perceived by investors, lenders, shareholders, and managers. Corporate investment is defined as expenditure comprising of capital expenses, research and development (R&D) expenses, acquisitions and advertisement expenses (Minton & Schrand, 1999;Cohen, 2014;Panagiotidis & Printzis, 2021). Kallapur and Trombley (2001) defined investment opportunity as capital expenditure incurred to launch a new product or to enlarge the production of an existing product.…”

“…They further highlighted that in some service industries, like restaurants, the role of R&D expenditure to generate cashflows is better played by advertisement expenditure thus, they factored it in when calculating investment expenditure. Kimaiyo (2017) estimated corporate investment as the sum of the changes in annual capital stock and depreciation whereas Panagiotidis and Printzis (2021) applied net value of fixed assets plus the year's depreciation.…”

“…The contention over how uncertainty affects corporate investment has persisted in the field of finance. Some studies point out that greater uncertainty is linked to lower investment in discretionary spending, R&D spending, and investments among small businesses (Minton & Shrand, 1999;Beladi et al, 2021;Panagiotidis & Printzis, 2021) whereas other studies assert that greater uncertainty is linked to higher investments (Baum et al, 2010;Cohen, 2014Kimaiyo, 2017. Baum et al (2010) distinguished between firm-specific and market-specific uncertainty and concluded that firm-specific uncertainty encourages investments whereas market-specific uncertainty has a dampening impact on investment expenditure.…”