A note on uncertainty and investment across the spectrum of irreversibility

Abstract

There is a lack of consensus regarding the sign of the uncertainty-investment relationship, with a strand of the literature suggesting a positive sign, and the Real Options Theory (ROT) advocating a negative relationship. As a way of testing the ROT, this paper empirically investigates its main prediction that the negative effect of uncertainty on investment is an increasing function of the degree of irreversibility. Empirical results provide support for the ROT since uncertainty is found to exert a higher impact on investment spending across the irreversibility spectrum.

Notes

¹ 211; Extraction of metalliferous ores and preliminary processing of metal, 212; Extraction of non-metalliferous ores and manufacture of non-metallic mineral products, 213; Chemicals and man-made fibres, 221; Manufacture of metal articles, Mechanical and instrument engineering, 222; Electrical and electronic equipment including office and computing equipment, 223; Manufacture of transport equipment, 231; Food, drink and tobacco, 232; Textiles, leather and clothing, 233; Timber and paper manufacture, printing, and 234; Other manufacturing industries not elsewhere specified.