We uncover a significant negative correlation between various volatility measures and private investment in developing countries, even when adding the standard control variables. No such correlation is uncovered when the investment measure is the sum of private and public investment spending. Indeed, public investment spending is positively correlated with some measures of volatility. These findings suggest that the detrimental impact of volatility on investment may be easier to detect using disaggregated data. We provide several possible interpretations for our findings. Nonlinearities in preferences or budget constraints can cause volatility to have first-order negative effects on private investment.

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This paper examines empirically the link between real exchange rate uncertainty and private investment in developing countries using a large cross country-time series data set. The paper builds a GARCH-based measure of real exchange rate volatility and finds that it has a strong negative impact on investment, after controlling for other standard investment determinants and taking into account their potential endogeneity. The impact of uncertainty is not uniform, however. There is some evidence of threshold effects, so that uncertainty only matters when it exceeds some critical level. In addition, the negative impact of real exchange rate uncertainty on investment is significantly larger in economies that are highly open and in those with less developed financial systems.

The current literature on irreversible investment decisions usually makes the assumption of constant interest rate. We study the impact of interest rate and revenue variability on the decision to carry out an irreversible investment project. Given the generality of the considered valuation problem, we first provide a thorough mathematical characterization of the two-dimensional optimal stopping problem and develop some new results. We establish that interest rate variability has a profound decelerating or accelerating impact on investment demand depending on whether the current interest rate is below or above the long run steady state interest rate and that its quantitative size may be very large. Allowing for interest rate uncertainty is shown to decelerate rational investment demand by raising both the required exercise premium of the irreversible investment opportunity and the value of waiting. Finally, we demonstrate that increased revenue volatility strengthens the negative impact of interest rate uncertainty and vice versa.

The issue of the impact of volatility on economic growth and performance has gained importance in recent years. Various aspects of this issue have received both theoretical and empirical attention. Empirical research has focused primarily on cross-country volatility, thus naturally setting the issue within an international context. Three primary sources of volatility have

Hunter, NBER, Northwestern, and Oxford for useful comments. Financial support from the ESRC Centre for Public Policy at the Institute for Fiscal Studies is gratefully acknowledged. The views presented are solely those of the authors and do not necessarily represent those of the Board of Governors of the Federal Reserve System or its staff We investigate the empirical relationship between company investment and measures of uncertainty, controlling for the effect of expected future profitability on current investment decisions. We consider three measures of uncertainty derived from (1) the volatility in the firm’s stock returns; (2) disagreement among securities analysts in their forecasts of the firm’s future profits; and (3) the variance of forecast errors in analysts ’ forecasts of the firm’s future profits. We consider two controls for expected profitability: (1) a standard measure of Brainard-Tobin’s q constructed from the firm’s stock market valuation; and (2) an alternative measure of the q ratio constructed from discounted forecasts of the firm’s future profits. Our sample consists of publicly-traded U.S. companies that were tracked by two

Panel data on Ghanaian manufacturing firms are used to test predictions from models of irreversible investment under uncertainty. Information on the entrepreneur’s subjective probability distribution over future demand for the firm’s products is used to construct the expected variance of demand, which is used as a measure of uncertainty. Empirical results support the prediction that firms wait to invest until the marginal revenue product of capital reaches a firm-specific hurdle level. Moreover, higher uncertainty raises the hurdle level that triggers investment, and uncertainty has a negative effect on investment levels that is greater for firms with more irreversible investment. [JEL D81, D92, C24] THIS PAPER ANALYZES the impact of uncertainty on the investment behavior of Ghanaian manufacturing firms using a panel data set for the years 1994–95. Recent literature has focused on how uncertainty affects investment when capital expenditures are largely sunk or irreversible. The empirical analysis presented here explores the extent to which the investmentuncertainty relationship is affected by the degree of reversibility of a firm’s capital expenditures, an issue that has not received much attention in the few existing firm-level studies of investment under uncertainty. Empirical methods for investigating the investment-uncertainty relationship are developed and applied to the example of Ghanaian manufacturing sector firms. The objectives are to test some of the theory’s predictions as well as to explore questions on which theory is not conclusive. In addition, the paper tests whether a firm-level uncertainty variable that measures the entrepreneur’s perceptions of risk is significant in the model estimation.

This paper studies ¯rm-level investment in the wake of the Mexican peso crisis of 1994. While exporters outperform nonexporters in terms of pro¯ts and sales after the devaluation, their investment is constrained by weak balance sheets. Speci¯cally, we ¯nd that ¯rms with heavy exposure to short-term foreign currency debt before the devaluation experienced relatively low levels of post-devaluation investment. The data also imply that increased sales uncertainty after the peg's collapse deterred investment, particularly in the tradeable sector. The results con¯rm the recent theoretical literature's focus on weak balance sheets as driving the recessionary impact of devaluations in emerging markets.

We document a significant negative effect of idiosyncratic stock-return volatility on investment. We address the endogeneity problem of stock return volatility by instrumenting for volatility with a measure of a firm’s customer base concentration. We propose that the negative effect of idiosyncratic risk on investment is partly due to managerial risk aversion, and find that the negative relationship between idiosyncratic uncertainty and investment is stronger for firms with high levels of insider ownership. Several mechanisms can mitigate this effect namely the use of option-based compensation and shareholder monitoring. We find that the investment-idiosyncratic relationship is weaker for firms that make use of option-based compensation, and insider ownership does not matter for firms primarily held by institutional investors.