TY - JOUR
T1 - The impact of ambiguity on managerial investment and cash holdings
AU - Neamtiu, Monica
AU - Shroff, Nemit
AU - White, Hal D.
AU - Williams, Christopher D.
N1 - Publisher Copyright:
© 2014 John Wiley & Sons Ltd.
PY - 2014/9/1
Y1 - 2014/9/1
N2 - Standard finance theory suggests that managers invest in projects that, in expectation, produce returns that justify the use of capital. An underlying assumption is that managers have the information necessary to understand the distributional properties of the pay-offs underlying the decision. This paper examines firm investment behavior when managers are likely to find it more challenging to develop expectations of pay-offs, namely during periods of increased macroeconomic ambiguity. In particular, we examine how macroeconomic ambiguity - proxied by the variance premium (Drechsler, ) and the dispersion in forecasts of corporate profits from the Survey of Professional Forecasters (Anderson et al., ) - impacts managerial capital investment and cash holdings. Consistent with ambiguity theory, we find that macroeconomic ambiguity is negatively associated with capital investment and positively associated with cash holdings. These results are robust to alternative explanations related to risk, investor sentiment and economic conditions. Moreover, consistent with recent theoretical real options literature, we find that ambiguity reduces the value of investment opportunities, while risk increases the value of such opportunities. Overall, these findings provide initial empirical evidence on the economic distinction between ambiguity and risk with respect to managerial investment and cash holdings.
AB - Standard finance theory suggests that managers invest in projects that, in expectation, produce returns that justify the use of capital. An underlying assumption is that managers have the information necessary to understand the distributional properties of the pay-offs underlying the decision. This paper examines firm investment behavior when managers are likely to find it more challenging to develop expectations of pay-offs, namely during periods of increased macroeconomic ambiguity. In particular, we examine how macroeconomic ambiguity - proxied by the variance premium (Drechsler, ) and the dispersion in forecasts of corporate profits from the Survey of Professional Forecasters (Anderson et al., ) - impacts managerial capital investment and cash holdings. Consistent with ambiguity theory, we find that macroeconomic ambiguity is negatively associated with capital investment and positively associated with cash holdings. These results are robust to alternative explanations related to risk, investor sentiment and economic conditions. Moreover, consistent with recent theoretical real options literature, we find that ambiguity reduces the value of investment opportunities, while risk increases the value of such opportunities. Overall, these findings provide initial empirical evidence on the economic distinction between ambiguity and risk with respect to managerial investment and cash holdings.
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U2 - 10.1111/jbfa.12079
DO - 10.1111/jbfa.12079
M3 - Article
AN - SCOPUS:84907933144
SN - 0306-686X
VL - 41
SP - 1071
EP - 1099
JO - Journal of Business Finance and Accounting
JF - Journal of Business Finance and Accounting
IS - 7-8
ER -