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.
Bibliographical notePublisher Copyright:
© 2022 Elsevier B.V.
- Investment inefficiency
- Optimal corporate investment
ASJC Scopus subject areas
- Business, Management and Accounting (miscellaneous)