- 1
- Arellano, M. and Bond, S. (1991), ‘Some tests of specification for panel data:

Total in-text references: 1- In-text reference with the coordinate 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

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- 3
- Baum, C. F., Caglayan, M. and Ozkan, N. (2004), ‘Nonlinear effects of exchange rate volatility on the volume of bilateral exports’,Journal of

Total in-text references: 1- In-text reference with the coordinate 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).

- In-text reference with the coordinate start=5910
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- Baum, C. F., Caglayan, M. and Talavera, O. (2008), ‘Uncertainty determinants of firm investment’,Economics Letters98(3), 282–287.

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- 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)
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- 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

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- Bloom, N., Bond, S. and Van Reenen, J. (2007), ‘Uncertainty and investment dynamics’,Review of Economic Studies74(2), 391–415.

Total in-text references: 2- In-text reference with the coordinate 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

- In-text reference with the coordinate start=10594
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- 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
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- Bloom et al. (2007)
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- 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

- In-text reference with the coordinate start=5774
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- Blundell, R. and Bond, S. (1998), ‘Initial conditions and moment restrictions in dynamic panel data models’,Journal of Econometrics87, 115–143.

Total in-text references: 1- In-text reference with the coordinate 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.

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- 9
- Bo, H. and Sterken, E. (2002), ‘Volatility of the interest rate, debt and firm investment: Dutch evidence’,Journal of Corporate Finance8(2), 179– 193.

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- 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
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- Bo and Sterken (2002)
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- 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.

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- Boyle, G. W. and Guthrie, G. A. (2003), ‘Investment, uncertainty, and liquidity’,The Journal of Finance58(5), 2143–2166.

Total in-text references: 1- In-text reference with the coordinate 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

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- Hennessy, C. A. (2004), ‘Tobin’s Q, debt overhang and investment’,Journal of Finance59, 1717–1742.

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- 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,
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- 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

- In-text reference with the coordinate start=2422
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- Jensen, M. C. and Meckling, W. H. (1976), ‘Theory of the firm: Managerial behavior, agency costs and ownership structure’,Journal of Financial Economics3(4), 305–360.

Total in-text references: 1- In-text reference with the coordinate 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

- In-text reference with the coordinate start=2495
- 13
- Lang, L., Ofek, E. and Stulz, R. M. (1996), ‘Leverage, investment, and firm growth’,Journal of Financial Economics40(1), 3–29.

Total in-text references: 1- In-text reference with the coordinate 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

- In-text reference with the coordinate start=2422
- 14
- Leahy, J. V. and Whited, T. M. (1996), ‘The effect of uncertainty on investment: Some stylized facts’,Journal of Money, Credit and Banking 28(1), 64–83.

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- 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).

- In-text reference with the coordinate start=5079
- 15
- Merton, R. C. (1980), ‘On estimating the expected return on the market: An exploratory investigation’,Journal of Financial Economics8, 323–61.

Total in-text references: 1- In-text reference with the coordinate 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

- In-text reference with the coordinate start=3965
- 16
- Myers, S. C. (1977), ‘Determinants of corporate borrowing’,Journal of Financial Economics25, 25–43. 8

Total in-text references: 1- In-text reference with the coordinate 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

- In-text reference with the coordinate start=2422
- 17
- Nickell, S. J. (1978),The investment decision of firms, Cambridge University

Total in-text references: 1- In-text reference with the coordinate 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.

- In-text reference with the coordinate start=1941
- 19
- Salinger, M. and Summers, L. (1983), Tax reform and corporate investment: A microeconomic simulation study,inM. Feldstein, ed., ‘Behavioral

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- 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).
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- 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.

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