How does uncertainty affect corporate investment inefficiency? Evidence from Europe

Sagi Akron, Ender Demir, José María Díez-Esteban, Conrado Diego García-Gómez

Research output: Contribution to journalArticlepeer-review

Abstract

We conduct a cross-country, firm-based analysis of the impact of uncertainty (World Uncertaınty Index–WUI) on corporate investment inefficiency. The analysis, conducted in the period 2012–2020 across 30 European region countries, demonstrates a negative impact of uncertainty on the absolute value of investment inefficiency. Specifically, there is a negative effect of uncertainty on investment inefficiency in cases of overinvestment, and a positive effect of uncertainty on investment inefficiency in cases of underinvestment. Thus, in both abnormal investment scenarios, uncertainty alleviates the investment inefficiency – namely, uncertainty may optimize investment decisions. The findings are robust to country, industry, and time fixed-effects; GMM; and different legal systems. Moreover, the findings shed important light on the exogenous uncertainty effect on asymmetric information and agency, generating investment decisions.

Original languageEnglish
Article number101752
JournalResearch in International Business and Finance
Volume62
DOIs
StatePublished - Dec 2022

Bibliographical note

Publisher Copyright:
© 2022 Elsevier B.V.

Keywords

  • Europe
  • Investment inefficiency
  • Optimal corporate investment
  • Overinvestment
  • Uncertainty
  • Underinvestment

ASJC Scopus subject areas

  • Business, Management and Accounting (miscellaneous)
  • Finance

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