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

Posted: 29 Mar 2010

See all articles by Christopher F. Baum

Christopher F. Baum

Boston College - Department of Economics

Mustafa O. Caglayan

University of Sheffield

Oleksandr Talavera

University of Birmingham

Date Written: April 2010

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.

JEL Classification: E22, D81, C23

Suggested Citation

Baum, Christopher (Kit) F. and Caglayan, Mustafa O. and Talavera, Oleksandr, On the Sensitivity of Firms' Investment to Cash Flow and Uncertainty (April 2010). Oxford Economic Papers, Vol. 62, Issue 2, pp. 286-306, 2010, Available at SSRN: https://ssrn.com/abstract=1578729 or http://dx.doi.org/gpp015

Christopher (Kit) F. Baum

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3673 (Phone)
617-552-2308 (Fax)

Mustafa O. Caglayan

University of Sheffield ( email )

17 Mappin Street
Sheffield, Sheffield S1 4DT
United Kingdom

Oleksandr Talavera

University of Birmingham ( email )

Edgbaston, Birmingham B15 2TT
United Kingdom

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