Working Paper: NBER ID: w30733
Authors: Murillo Campello; Gaurav Kankanhalli
Abstract: Uncertainty over future business conditions lies at the heart of firm decision-making. Uncertainty can arise from a myriad of sources and is difficult to measure. We present a simple conceptual framework showing how several key corporate decisions are affected by uncertainty. We also highlight recent advances in the measurement of uncertainty, distinguishing between approaches that gauge aggregate uncertainty and those that capture different dimensions of firm-specific uncertainty. These approaches incorporate information obtained from market prices, big data, machine learning techniques, surveys, and more. We then review the growing body of empirical work that studies the role played by uncertainty in shaping outcomes ranging across corporate investment, asset base composition, innovation, liquidity management, payouts, and mergers. Our review outlines several opportunities for future research.
Keywords: Corporate Decision-Making; Uncertainty; Investment; R&D; Liquidity Management
JEL Codes: G31; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased uncertainty (D89) | Greater incentive to delay investment and disinvestment decisions (G31) |
| Costs of reversibility (D23) | Amplified effects of uncertainty (D89) |
| Increased uncertainty (D89) | Stimulate investment in R&D projects (O39) |