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

Christopher Baum, Mustafa Caglayan () and Oleksandr Talavera ()

Oxford Economic Papers, 2010, vol. 62, issue 2, 286-306

Abstract: We investigate the analytical and empirical linkages between cash flow, uncertainty, and firms' capital investment behavior. Our empirical approach constructs measures of own- and market-specific uncertainty from firms' daily stock returns and S&P 500 index returns along with a CAPM-based risk measure. Our results indicate that even in the presence of important firm-specific variables, uncertainty is an important determinant of firms' investment behavior. Depending on the measure of uncertainty used, investment may be stimulated or curtailed by the effects of uncertainty on its own or through its interactions on cash flow. Copyright 2010 Oxford University Press 2009 All rights reserved, Oxford University Press.

Date: 2010
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Working Paper: On the Sensitivity of Firms' Investment to Cash Flow and Uncertainty (2008)
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