The impact of ambiguity on managerial investment and cash holdings

Monica I Neamtiu, Nemit Shroff, Hal D. White, Christopher D. Williams

Research output: Contribution to journalArticle

11 Citations (Scopus)

Abstract

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.

Original languageEnglish (US)
Pages (from-to)1071-1099
Number of pages29
JournalJournal of Business Finance and Accounting
Volume41
Issue number7-8
DOIs
StatePublished - Sep 1 2014

Fingerprint

Cash holdings
Macroeconomics
Managers
Capital investment
Firm investment
Profit
Investment opportunities
Investor sentiment
Real options
Survey of Professional Forecasters
Premium
Economics
Economic conditions
Finance
Investment behavior
Empirical evidence

Keywords

  • Ambiguity
  • Cash holdings
  • Investment
  • Risk

ASJC Scopus subject areas

  • Business, Management and Accounting (miscellaneous)
  • Accounting
  • Finance

Cite this

The impact of ambiguity on managerial investment and cash holdings. / Neamtiu, Monica I; Shroff, Nemit; White, Hal D.; Williams, Christopher D.

In: Journal of Business Finance and Accounting, Vol. 41, No. 7-8, 01.09.2014, p. 1071-1099.

Research output: Contribution to journalArticle

Neamtiu, Monica I ; Shroff, Nemit ; White, Hal D. ; Williams, Christopher D. / The impact of ambiguity on managerial investment and cash holdings. In: Journal of Business Finance and Accounting. 2014 ; Vol. 41, No. 7-8. pp. 1071-1099.
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