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Oxford Economic Papers Advance Access published online on June 2, 2009
Oxford Economic Papers, doi:10.1093/oep/gpp015
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© Oxford University Press 2009 All rights reserved

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

Christopher F. Baum*, Mustafa Caglayan{dagger}, and Oleksandr Talavera{ddagger}

*Department of Economics, Boston College, Chestnut Hill, MA 02467, USA, and DIW Berlin; e-mail: baum{at}bc.edu
{dagger}Department of Economics, University of Sheffield; e-mail: m.caglayan{at}sheffield.ac.uk
{ddagger}Aberdeen Business School, Robert Gordon University; e-mail: o.talavera{at}rgu.ac.uk

JEL classifications: E22, D81, C23


  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.


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