The 14 reference contexts in paper Christopher F. Baum, Mustafa Caglayan, Oleksandr Talavera (2008) “On the Investment Sensitivity of Debt under Uncertainty” / RePEc:boc:bocoec:686

  1. Start
    1736
    Prefix
    that preexisting debt could induce excessive risk-taking when growth options are prematurely exercised.2 In this paper, we empirically examine the role of leverage onU.S. manufacturing firms’ investment behavior while incorporating the effects of firmspecific and market-level uncertainty in that relationshipon their own and in conjunction with leverage. Our empirical model is motivated by
    Exact
    Bo and Sterken (2002)
    Suffix
    who provide an analytical model to bring in debt and (interest rate) uncertainty on their own and in interaction to explain firms’ capital investment behavior. Their model is based on Nickell (1978)and assumes that managers seek to maximize expected cash flow while minimizing its volatility.
    (check this in PDF content)

  2. Start
    1941
    Prefix
    Our empirical model is motivated by Bo and Sterken (2002) who provide an analytical model to bring in debt and (interest rate) uncertainty on their own and in interaction to explain firms’ capital investment behavior. Their model is based on
    Exact
    Nickell (1978)and
    Suffix
    assumes that managers seek to maximize expected cash flow while minimizing its volatility. Our results reveal that leverage may have a positive or negative impact on firms’ investment as uncertainty changes.3Differing from their approach, we also control for firms’ cash flow in our empiricalinvestigation.
    (check this in PDF content)

  3. Start
    2422
    Prefix
    Our results reveal that leverage may have a positive or negative impact on firms’ investment as uncertainty changes.3Differing from their approach, we also control for firms’ cash flow in our empiricalinvestigation. We derive a proxy forintrinsic(firm specific) uncertainty from firms’ stock returns and another proxy formarket(macro) uncertainty from S&P 500 1See, for example,
    Exact
    Myers (1977), Lang, Ofek and Stulz (1996),Hennessy (2004).
    Suffix
    2See including Jensen and Meckling (1976) and Sundaresan andWang (2006). 3Also see Bloom, Bond and Van Reenen (2007) who show that investment will respond more cautiously to a given demand shock at higher levels of uncertainty and Baum, Caglayan and Talavera (in press) who provide evidence that,depending on the type of uncertainty, investment may be stimulated or curtailed as afirm’s cash flow var
    (check this in PDF content)

  4. Start
    2495
    Prefix
    We derive a proxy forintrinsic(firm specific) uncertainty from firms’ stock returns and another proxy formarket(macro) uncertainty from S&P 500 1See, for example, Myers (1977), Lang, Ofek and Stulz (1996),Hennessy (2004). 2See including
    Exact
    Jensen and Meckling (1976) and
    Suffix
    Sundaresan andWang (2006). 3Also see Bloom, Bond and Van Reenen (2007) who show that investment will respond more cautiously to a given demand shock at higher levels of uncertainty and Baum, Caglayan and Talavera (in press) who provide evidence that,depending on the type of uncertainty, investment may be stimulated or curtailed as afirm’s cash flow varies. 2 index returns.4 2 Empirical findings 2
    (check this in PDF content)

  5. Start
    3247
    Prefix
    afirm’s cash flow varies. 2 index returns.4 2 Empirical findings 2.1 Data sources and construction In our empirical analysis, we employ an unbalanced panel of manufacturing firms for the 1988–2005 period drawn from Standard and Poor’sIndustrial AnnualCOMPUSTATdatabase. Our sample contains 7,769 firm-years for which the replacement value of the real capital stock may be imputed by the method of
    Exact
    Salinger and Summers (1983).
    Suffix
    We only consider firmswho have not undergone substantial changes in their composition during the sample period. As these changes are not directly observable, we calculate the growth rate of each firm’s real total assets, and trim the annual distribution of this growth rate by the 1st and 99th percentiles.
    (check this in PDF content)

  6. Start
    3965
    Prefix
    One percent from either end of the annual returns distribution was trimmed. Our estimation sample, taking lagged values and missing values into account, contains 6,514 firmyears pertaining to 481 firms.5 Using a method proposed by
    Exact
    Merton (1980),
    Suffix
    we compute firm- and market-specific uncertainty measures utilizing the intra-annual variations in stock returns and aggregate financial market series. This approach avoids such potential problems as high shock persistence when moving average rep4Baum, Caglayan and Talavera (2008) show that the impact of market, firm-specific andCAPM-based uncertainty on firms’ investment can differ in sign andmag
    (check this in PDF content)

  7. Start
    4225
    Prefix
    , taking lagged values and missing values into account, contains 6,514 firmyears pertaining to 481 firms.5 Using a method proposed by Merton (1980), we compute firm- and market-specific uncertainty measures utilizing the intra-annual variations in stock returns and aggregate financial market series. This approach avoids such potential problems as high shock persistence when moving average rep4
    Exact
    Baum, Caglayan and Talavera (2008)
    Suffix
    show that the impact of market, firm-specific andCAPM-based uncertainty on firms’ investment can differ in sign andmagnitude. 5Our investigation yields similar results when we trimmed the top and bottom 5% of the sample. 3 resentations are used, and low correlation in volatility whenARCH/GARCH models are applied to quantify volatility in low-frequencyseries.6 2.2 Descriptive statistics Descriptiv
    (check this in PDF content)

  8. Start
    5079
    Prefix
    The average (median) investment rate (defined as theratio of real investment expenditures to the lagged replacement value of the real capital stock) for our sample is about 11% (8.3%) and that of Tobin’sQis about 2.95 (1.71). These values ofQare comparable to those in Table 1 of
    Exact
    Leahy and Whited (1996).
    Suffix
    The last two lines, labeled asηitandεt, give descriptive statistics for the constructed measures of uncertainty obtained from firm stock returns andS&Pindex returns, respectively.7 2.3 The linkages between uncertainty, leverage and capital investment We employ the dynamic panel data (DPD) approach developed by Arellano and Bond (1991).
    (check this in PDF content)

  9. Start
    5412
    Prefix
    The last two lines, labeled asηitandεt, give descriptive statistics for the constructed measures of uncertainty obtained from firm stock returns andS&Pindex returns, respectively.7 2.3 The linkages between uncertainty, leverage and capital investment We employ the dynamic panel data (DPD) approach developed by
    Exact
    Arellano and Bond (1991).
    Suffix
    All models are estimated using the two-stepSystemGMM estimator of Blundell and Bond (1998). Column 1 of Table 2 presents a standard investment model which includes the basic explanatory variables including the lagged dependent variable,Q,CF/T A, and laggedmvB/T A(leverage), where we deflate the 6The Merton approach differs from that of Bloom et al. (2007), who also make use of daily stock returns
    (check this in PDF content)

  10. Start
    5502
    Prefix
    two lines, labeled asηitandεt, give descriptive statistics for the constructed measures of uncertainty obtained from firm stock returns andS&Pindex returns, respectively.7 2.3 The linkages between uncertainty, leverage and capital investment We employ the dynamic panel data (DPD) approach developed by Arellano and Bond (1991). All models are estimated using the two-stepSystemGMM estimator of
    Exact
    Blundell and Bond (1998).
    Suffix
    Column 1 of Table 2 presents a standard investment model which includes the basic explanatory variables including the lagged dependent variable,Q,CF/T A, and laggedmvB/T A(leverage), where we deflate the 6The Merton approach differs from that of Bloom et al. (2007), who also make use of daily stock returns data, but agrees in spirit in taking the daily variations into account.
    (check this in PDF content)

  11. Start
    5774
    Prefix
    Column 1 of Table 2 presents a standard investment model which includes the basic explanatory variables including the lagged dependent variable,Q,CF/T A, and laggedmvB/T A(leverage), where we deflate the 6The Merton approach differs from that of
    Exact
    Bloom et al. (2007),
    Suffix
    who also make use of daily stock returns data, but agrees in spirit in taking the daily variations into account. See Baum, Caglayan and Ozkan (2004) for a detailed discussion of the Merton procedure. 7In the estimated model, these measures enter in lagged form to reflect the manager’s information set at timet. 4 cash flow (CF) and the market value of the debt (mvB) by beginning-ofperiod total asse
    (check this in PDF content)

  12. Start
    5910
    Prefix
    Column 1 of Table 2 presents a standard investment model which includes the basic explanatory variables including the lagged dependent variable,Q,CF/T A, and laggedmvB/T A(leverage), where we deflate the 6The Merton approach differs from that of Bloom et al. (2007), who also make use of daily stock returns data, but agrees in spirit in taking the daily variations into account. See
    Exact
    Baum, Caglayan and Ozkan (2004)
    Suffix
    for a detailed discussion of the Merton procedure. 7In the estimated model, these measures enter in lagged form to reflect the manager’s information set at timet. 4 cash flow (CF) and the market value of the debt (mvB) by beginning-ofperiod total assets (T A).
    (check this in PDF content)

  13. Start
    10594
    Prefix
    As market turmoil increases, banks will curtail credit lines rendering any new investment unrealistic regardless of the potential returns from lending. 3 Conclusions In this paper we show that the overall effect of leverage on capital investment may be stimulating or mitigating depending on the underlying uncertainty. In contrast to
    Exact
    Bloom et al. (2007)
    Suffix
    who find that firm-specific time varying uncertainty affects firms’ behavior while macroeconomic uncertainty does not, our findings suggest that both firm-specific and market-level (macroeconomic) uncertainty can enhance or impair fixed investment, alone or in conjunction with firms’ degree of leverage, clouding the relationship between investment and uncertainty (Boyle and Guthrie (2003)). 7
    (check this in PDF content)

  14. Start
    10977
    Prefix
    contrast to Bloom et al. (2007) who find that firm-specific time varying uncertainty affects firms’ behavior while macroeconomic uncertainty does not, our findings suggest that both firm-specific and market-level (macroeconomic) uncertainty can enhance or impair fixed investment, alone or in conjunction with firms’ degree of leverage, clouding the relationship between investment and uncertainty
    Exact
    (Boyle and Guthrie (2003)).
    Suffix
    7
    (check this in PDF content)