The Impact of Ambiguity on Managerial Investment and Cash Holdings
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...
| Main Authors: | , , , |
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| Format: | Article |
| Language: | en_US |
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Wiley Blackwell
2017
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| Online Access: | http://hdl.handle.net/1721.1/111108 https://orcid.org/0000-0002-3472-5443 |
| _version_ | 1826204093442424832 |
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| author | Neamtiu, Monica White, Hal D. Williams, Christopher D. Shroff, Nemit |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Neamtiu, Monica White, Hal D. Williams, Christopher D. Shroff, Nemit |
| author_sort | Neamtiu, Monica |
| collection | MIT |
| description | 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, 2010) and the dispersion in forecasts of corporate profits from the Survey of Professional Forecasters (Anderson et al., 2009) – 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. |
| first_indexed | 2024-09-23T12:48:48Z |
| format | Article |
| id | mit-1721.1/111108 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T12:48:48Z |
| publishDate | 2017 |
| publisher | Wiley Blackwell |
| record_format | dspace |
| spelling | mit-1721.1/1111082022-09-28T10:13:07Z The Impact of Ambiguity on Managerial Investment and Cash Holdings Neamtiu, Monica White, Hal D. Williams, Christopher D. Shroff, Nemit Sloan School of Management Shroff, Nemit 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, 2010) and the dispersion in forecasts of corporate profits from the Survey of Professional Forecasters (Anderson et al., 2009) – 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. 2017-09-01T14:52:14Z 2017-09-01T14:52:14Z 2014-10 Article http://purl.org/eprint/type/JournalArticle 0306-686X 1468-5957 http://hdl.handle.net/1721.1/111108 Neamtiu, Monica, et al. “The Impact of Ambiguity on Managerial Investment and Cash Holdings.” Journal of Business Finance & Accounting 41, 7–8 (August 2014): 1071–1099 © 2014 John Wiley & Sons Ltd https://orcid.org/0000-0002-3472-5443 en_US http://dx.doi.org/10.1111/jbfa.12079 Journal of Business Finance & Accounting Creative Commons Attribution-Noncommercial-Share Alike http://creativecommons.org/licenses/by-nc-sa/4.0/ application/pdf Wiley Blackwell Prof. Shroff via Shikha Sharma |
| spellingShingle | Neamtiu, Monica White, Hal D. Williams, Christopher D. Shroff, Nemit The Impact of Ambiguity on Managerial Investment and Cash Holdings |
| title | The Impact of Ambiguity on Managerial Investment and Cash Holdings |
| title_full | The Impact of Ambiguity on Managerial Investment and Cash Holdings |
| title_fullStr | The Impact of Ambiguity on Managerial Investment and Cash Holdings |
| title_full_unstemmed | The Impact of Ambiguity on Managerial Investment and Cash Holdings |
| title_short | The Impact of Ambiguity on Managerial Investment and Cash Holdings |
| title_sort | impact of ambiguity on managerial investment and cash holdings |
| url | http://hdl.handle.net/1721.1/111108 https://orcid.org/0000-0002-3472-5443 |
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