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On the Sensitivity of Firms' Investment to Cash Flow and Uncertainty

Author

Listed:
  • Christopher F. Baum

    (Boston College
    DIW Berlin)

  • Mustafa Caglayan

    (University of Sheffield)

  • Oleksandr Talavera

    (Aberdeen Business School)

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.

Suggested Citation

  • Christopher F. Baum & Mustafa Caglayan & Oleksandr Talavera, 2006. "On the Sensitivity of Firms' Investment to Cash Flow and Uncertainty," Boston College Working Papers in Economics 638, Boston College Department of Economics, revised 26 Apr 2008.
    • Handle: RePEc:boc:bocoec:638
    Note: previously circulated as "Firm Investment and Financial Frictions"
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    More about this item

    Keywords

    capital investment; cash flow; financial frictions; uncertainty; CAPM;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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