Investment Timing and Uncertainty (in Japanese)

Keiichi Shima

Economic Analysis, 2011, vol. 184, 32-49

Abstract: When investment expenditures are irreversible, theory suggests that firms will be disinclined to invest. The aim of this paper is to analyze the implications of the theory of irreversible investment under uncertainty using data from Japanese manufacturing firms. We estimate firm-level hazard functions using a flexible semiparametric specification. We use a sample of 623 manufacturing firms listed on the Tokyo, Osaka, and Nagoya stock exchanges to test the impact of profit uncertainty on the timing of large investment projects. Hazard model estimates suggest an increase in profit uncertainty may delay the timing of large investment projects. We also examine the effects of financial constraints on a capital adjustment hazard by incorporating covariates such as cash flow, dividend payout, and bond market access. The results indicate that the effect of profit uncertainty on investment depends on the severity of financial constraints. Access to the bond market and higher cash flow both mitigating the financial constraints have a significant impact on the timing of large investments.

Date: 2011
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