On the investment sensitivity of debt under uncertainty

Abstract

We investigate the impact of debt on a panel of U.S. manufacturing firms' capital investment behavior as the underlying firm-specific and market-level uncertainty changes. Our estimates show that the influence of leverage on capital investment may be stimulating or mitigating depending on the effects of uncertainty.

Stock return volatility and capital structure measures of nonfinancial firms in a dynamic panel model: Evidence from Pakistan

“…This argument is also highlighted by Feidakis and Rovolis (2007) that business risk is inversely related with leverage. Firms significantly reduce their leverage as well as investment expenditures while facing the high business risk (Baum, Caglayan, & Talavera, 2010). Firms significantly reduce their leverage as well as investment expenditures while facing the high business risk (Baum, Caglayan, & Talavera, 2010).…”

Firm Survival, Uncertainty, and Financial Frictions: Is There a Financial Uncertainty Accelerator?

“…Although there is less work looking at uncertainty and firm survival, there is an established literature that examines uncertainty and firmlevel investment and R&D: see Ghosal and Loungani (2000), Ghosal (2003), Bo and Lensin (2005), Baum, Caglayan, and Talavera (2010b), and Gilchrist, Sim, and Zakrajsek (2013). 3 Bloom (2007) argues that uncertainty about future productivity and demand conditions will generate fluctuations in investment, hiring, and productivity.…”

“…Ghosal (2003) highlights that uncertainty and sunk costs at the industry level have a large negative impact on entry and exit probabilities of firms. 4 The interrelationship between uncertainty, investment, and financial variables is discussed by Baum, Stephan, and Talavera (2009) and Baum, Caglayan, andTalavera (2010a, 2010b). The aforementioned studies identify an important channel by which uncertainty reduces firm access to credit, consequently leading to lower investment.…”

“…First, we investigate the link between uncertainty and firm survival, paying special attention to the most recent financial crisis. While there is a large and growing literature on the effects of uncertainty on firms' investment, capital structure, and inventories (see Baum, Stephan, and Talavera 2009;Baum, Caglayan, andTalavera 2010a, 2010b;Caglayan, Maioli, and Mateut 2012;Caglayan and Rashid 2014), less attention has been given to the important dimension of firm survival. Yet, the potential closure of a great number of businesses was one of the most visible threats to economic performance during the Great Recession.…”

“…Our data-set is made up mainly by unlisted companies. Unlike previous studies which typically rely on listed companies (see for example Baum, Stephan, and Talavera 2009and Baum, Caglayan, and Talavera 2010a, 2010b, we use a large panel of financial data on UK firms, over 98% of which are not quoted on the stock market. This characteristic is vitally important because these 2.…”