How does uncertainty affect corporate investment inefficiency? Evidence from Europe

Sagi Akron, Ender Demir, José María Díez-Esteban and Conrado Diego García-Gómez

Research in International Business and Finance, 2022, vol. 62, issue C

Abstract: We conduct a cross-country, firm-based analysis of the impact of uncertainty (World Uncertaınty Index–WUI) on corporate investment inefficiency. The analysis, conducted in the period 2012–2020 across 30 European region countries, demonstrates a negative impact of uncertainty on the absolute value of investment inefficiency. Specifically, there is a negative effect of uncertainty on investment inefficiency in cases of overinvestment, and a positive effect of uncertainty on investment inefficiency in cases of underinvestment. Thus, in both abnormal investment scenarios, uncertainty alleviates the investment inefficiency – namely, uncertainty may optimize investment decisions. The findings are robust to country, industry, and time fixed-effects; GMM; and different legal systems. Moreover, the findings shed important light on the exogenous uncertainty effect on asymmetric information and agency, generating investment decisions.

Keywords: Uncertainty; Investment inefficiency; Optimal corporate investment; Overinvestment; Underinvestment; Europe (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:62:y:2022:i:c:s0275531922001398

DOI: 10.1016/j.ribaf.2022.101752

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