Investment, Uncertainty, and Liquidity

On the investment sensitivity of debt under uncertainty

“…In contrast to Bloom et al (2007) who find that firm-specific time varying uncertainty affects firms' behavior while macroeconomic uncertainty does not, our findings suggest that both firm-specific and market-level (macroeconomic) uncertainty can enhance or impair fixed investment, alone or in conjunction with firms' degree of leverage, clouding the relationship between investment and uncertainty (Boyle and Guthrie (2003)). Notes: p25, p50, p75 are the quartiles of the variables, while sd are their standard deviations.…”

On the sensitivity of firms' investment to cash flow and uncertainty

“…Interestingly, we find that while the effects of Own uncertainty through cash flows on firms' fixed investment is positive, that of Market uncertainty is negative. In contrast to those of Bloom et al (2007), our findings suggest that (although the two models differ) different types of uncertainty can enhance or impair fixed investment by themselves or through cash flow, potentially clouding the relationship between investment and uncertainty (Boyle and Guthrie (2003)). We also show that the impact of cash flow on capital investment changes as the underlying uncertainty varies.…”

“…19 The point estimates and 95% confidence interval for each derivative are computed and plotted in Figure 1. Even a casual inspection of these derivatives shows that the role of uncertainty on firm investment is not trivial, and varies considerably across types of uncertainty, in line with arguments put forth by Boyle and Guthrie (2003). 20 In particular, one can see that an increase in the firm-level (η) uncertainty measure leads to an increase in 19 Tables of numerical values underlying the graphs are available from the authors upon request. 20 ".…”

“…Bloom et al (2007) suggest that higher uncertainty renders firms more cautious and reduces the effects of demand shocks on investment. Boyle and Guthrie (2003) argue that offsetting effects of payoff and financing uncertainty must be distinguished in order to accurately gauge their effects on investment.…”

Corporate Control and Real Investment in Incomplete Markets

“…To determine the values of the quantities of interest, it is necessary to select parameter values for the initial value of the firm's assets A 0 , the cost of investment I, the risk free interest rate r, the dividend yield d, the firm's beta b M , the market volatility s M , idiosyncratic volatility k, the subjective discount rate r, the Sharpe ratio y, the cost parameter g, and the coefficient of risk aversion R. Whenever possible, we use the parameters values of Boyle and Guthrie (2003). Additional parameter values for the base case environment are reported in Table 1.…”