Microeconometric evidence on uncertainty and investment

Abstract

We use a range of uncertainty measures for individual UK companies to explore the relationship between uncertainty and …rm-level investment behaviour.We use a panel of 655 quoted non-…nancial UK …rms, in the period 1987-2000, for which information on analysts' earnings forecasts is available on the I/B/E/S database.The measures of uncertainty that we consider are: volatility in daily share prices; volatility in monthly consensus earnings forecasts; and the variance of forecast errors for the consensus forecasts.For a sub-sample of …rms tracked by two or more analysts, we also consider the dispersion in earnings forecasts across individual analysts.We …nd signi…cant negative e¤ects on investment from each of these measures of uncertainty individually.When we consider them jointly, both volatility measures appear to be informative, and to provide distinct information that helps to explain …rm-level investment spending.These e¤ects are robust to including a range of additional controls, including Tobin's Q, a measure of the level of expected pro…tability constructed from the analysts'earnings forecasts, cash ‡ow and cash stock variables, and real sales growth.Our preferred speci…cations suggest that a 10% increase in uncertainty implies a 4.4% reduction in investment rates in the short run, and would imply an 8.6% reduction in the capital stock in the long run if the higher level of uncertainty was sustained.We do not …nd any signi…cant di¤erences in the impact e¤ect of sales growth on investment between …rms facing di¤erent levels of uncertainty.

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