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Endogenous Uncertainty: Does Investment Inefficiency Contributes to Uncertainty?

Author

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  • Rita Juliana

    (Universitas Pelita Harapan, Indonesia)

  • Irwan Adi Ekaputra

    (Universitas Indonesia, Indonesia)

  • Zaäfri Ananto Husodo

    (Universitas Indonesia, Indonesia)

  • Sung suk Kim

    (Universitas Pelita Harapan, Indonesia)

Abstract

We investigate the endogenous relationship between firm-level investments and macro-level uncertainty for U.S publicly listed firms from 1996 Q1 to 2019 Q4. Based on the Vector AutoRegressive analysis, we learn that underinvestment tends to increase news-based Economic Policy Uncertainty (EPU); overinvestment increases macroeconomic uncertainty; and both under- and over-investment lead to increasing financial uncertainty. Furthermore, the information flow explanation is closely linked to a positive relationship between underinvestment and EPU. Meanwhile, the positive relationship between overinvestment and macroeconomic uncertainty is related to the excessive growth speculation explanation. The small (large) firm subsample analysis also reiterates the explanation of the information flow (excessive growth speculation).

Suggested Citation

  • Rita Juliana & Irwan Adi Ekaputra & Zaäfri Ananto Husodo & Sung suk Kim, 2024. "Endogenous Uncertainty: Does Investment Inefficiency Contributes to Uncertainty?," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 27(2), pages 265-298, May.
    • Handle: RePEc:idn:journl:v:27:y:2024:i:2d:p:265-298
    DOI: https://doi.org/10.59091/2460-9196.2275
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    References listed on IDEAS

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