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

Baum, Christopher F.; Çağlayan, Mustafa; Talavera, Oleksandr

doi:10.1093/oep/gpp015

Cited by 88 publications

(77 citation statements)

References 41 publications

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“…Charemza et al (2015) suggest a new measure of inflation forecast uncertainty that accounts for possible inter-country dependence. Berger and Herz (2014) measure global uncertainty as the conditional variances of global factors in inflation and output growth in a bivariate dynamic factor model with GARCH errors for the nine industrialized countries; Canada, France,Germany,Italy,Japan,4 An important thread in the literature is that uncertainty faced by the individual firm is embodied in its own stock price volatility (Leahy and Whited (1996), Bloom (2009), Bloom et al (2007) and Baum et al (2010)), among others.…”

Section: Introductionmentioning

confidence: 99%

The Impact of Global Uncertainty on the Global Economy, and Large Developed and Developing Economies

Kang¹,

Ratti

Vespignani

2017

SSRN Journal

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Global uncertainty shocks are associated with a sharp decline in global inflation, global growth and in the global interest rate. Over 1981 to 2014 global financial uncertainty forecasts 18.26% and 14.95% of the variation in global growth and global inflation respectively. Global uncertainty shocks have more protracted, statistically significant and substantial effects on global growth, inflation and interest rate than U.S. uncertainty shocks. U.S. uncertainty lags global uncertainty by one month. When controlling for domestic uncertainty, the decline in output following a rise in global uncertainty is statistically significant in each country, with the exception of the decline for China. The effects for the U.S. and for China are also relatively small. For most economies, a positive shock to global uncertainty has a depressing effect on prices and official interest rates. Exceptions are Brazil, Mexico and Russia, economies with large capital outflows during financial crises. Decomposition of global uncertainty shocks shows that global financial uncertainty shocks are more important than non-financial shocks.

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Section: Introductionmentioning

confidence: 99%

The Impact of Global Uncertainty on the Global Economy, and Large Developed and Developing Economies

Kang¹,

Ratti

Vespignani

2017

SSRN Journal

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“…It is found that both sources of uncertainty have a negative impact on investment (other than in highly concentrated industries in which neither effect is important). Baum et al (2010) distinguish between own uncertainty, based on a firms' stock returns, market uncertainty, derived from stock index returns, and a measure of covariance between the two. An increase in market uncertainty inhibits firm-level investment, and the sign of the effect of the other measures of uncertainty on firm-level investment depend on interaction with cash flow.…”

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confidence: 99%

Economic policy uncertainty and firm-level investment

Kang

Lee

Ratti

2014

Journal of Macroeconomics

462

190

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This paper examines the effect of economic policy uncertainty and its components on firm-level investment. It is found that economic policy uncertainty in interaction with firm-level uncertainty depresses firms' investment decisions. When firms are in doubt about costs of doing business due to possible changes in regulation, cost of health care and taxes, they become more guarded with investment plans. The effect of economic policy uncertainty on firm-level investment is greater for firms with higher firm-level uncertainty and during a recession. News-based policy shock has a significantly negative long-term effect on firms' investment. Federal expenditure forecast interquartile range shock has a significant negative effect in the short-and long-run. Policy uncertainty does not seem to influence the investment decisions of the very largest firms (about 20% of listed firms). JEL classification: E22, E61, G31

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“…The resulting policy-related economic uncertainty, referred to as economic policy uncertainty, may affect the entire economy for instance through loss of outputs and jobs, stimulation of equity market uncertainty and slow economic recovery after a recession. Over the past thirty years, a number of researches have focused on the effect of economic policy uncertainty on macroeconomic variables: economic growth, inflation, investment and employment (Bernanke 1983Rodrik 1991Aizenman and Marion 1993;Ali 2001;Hermes and Lensink 2001;Bloom et al 2007;Bloom 2009;Bachmann et al 2013;Baum et al 2010;Jones and Olson 2013;Bhagat et al 2013;Colombo 2013 among others). The general consensus is that policy uncertainty has a negative effect on economic growth and investment but a less clear-cut effect on inflation.…”

Section: Introductionmentioning

confidence: 99%

Causality Between Us Economic Policy and Equity Market Uncertainties: Evidence from Linear and Nonlinear Tests

Ajmi

Aye

Balcılar

et al. 2015

Journal of Applied Economics

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This paper examines the causal relationship between economic policy uncertainty (EPU) and equity market uncertainty (EMU) in the US using linear and nonlinear Granger causality tests. We use daily data on the newly developed indexes by Baker et al. (2013aBaker et al. ( ) covering 1985Baker et al. ( :01:01 to 2013 Results from the linear causality tests indicate strong bidirectional causality. We test for parameters stability, and find strong evidence of short run parameter instability, thus invalidating any conclusion from the full sample linear estimations. Therefore we turn to nonlinear tests. Using Hiemstra and Jones (1994), Diks and Panchenko (2006), and Kyrtsou and Labys (2006) symmetric test, we observe a stronger predictive power from EMU to EPU than from EPU to EMU. (2006) test, we find no evidence of positive predictive power from EPU to EMU. However, we find strong evidence of positive predictive power from EMU to EPU and only weak evidence of negative EPU causing EMU. Performing the causality test using the Sato et al. (2007) time-varying method, we find that the causality between EPU and EMU is not constant over time but rather time-varying. Hence, we implement a sub-sample bootstrap rolling window causality tests to fully account for the existence of structural breaks. Using the intensity plots of the p-values from this, we find evidence that EPU can help predict the movements in EMU only around 1993, 2004 and, 2006. However, we find strong evidence that EMU can help predict the movements in EPU throughout the sample period barring around 1998, 2003 and 2005. Further, the analysis of total effects based on the bootstrap sum of coefficients suggests a positive and stronger causal effect from EMU to EPU but smaller and insignificant causality from EPU to EMU. The implications of these findings for both investors and policy makers are provided.

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

Cited by 88 publications

References 41 publications

The Impact of Global Uncertainty on the Global Economy, and Large Developed and Developing Economies

The Impact of Global Uncertainty on the Global Economy, and Large Developed and Developing Economies

Economic policy uncertainty and firm-level investment

Causality Between Us Economic Policy and Equity Market Uncertainties: Evidence from Linear and Nonlinear Tests

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