Sensitivity of Firms' Investment to Uncertainty and Cash Flow

Document Type : Research Paper

Authors

1 Ph.D., Department of Financial and Accounting, Faculty of Management and Accounting, College of Farabi, University of Tehran, Qom, Iran.

2 Prof., Department of Financial Engineering, College of Management, University of Tehran, Tehran, Iran.

3 Prof., Department of Financial Markets and Institutions, College of Management, University of Tehran, Tehran, Iran.

Abstract

Objective
One of the most important financial decisions companies make is investment decisions. The purpose of investment decisions is to obtain a higher return, and to obtain a suitable return through investment, accurate knowledge of the effective factors is essential, because fluctuations in investment can come from various sources. According to real option theory, uncertainty plays a crucial role in shaping investment decisions for companies. This is because uncertainty impacts the future cash flows of companies and increases information asymmetry between managers and shareholders. Therefore, uncertainty is a key factor that must be considered in investment decisions, as it plays a decisive role in shaping those decisions. The main goal of the research is to investigate the sensitivity of companies' investment to uncertainty and cash flow in companies listed on the Tehran Stock Exchange. Additionally, this study aims to expand the investment literature by investigating the impact of various forms of uncertainty (firm-specific uncertainty, market uncertainty, economic uncertainty, and Capital Asset Pricing Model (CAPM)-based uncertainty) on investment. Furthermore, this study empirically tests the effect of cash flow on the relationship between different forms of uncertainty and company investment.
 
Methods
This research is applied in terms of its objective and correlational in terms of its nature, specifically causal. In this research, the library method was used to collect information related to the theoretical foundations. To achieve the research objectives, data from 840 firm-year observations during the period from 2014 to 2021 were utilized. Additionally, all models were estimated using the two-step Generalized Method of Moments (GMM) estimator proposed by Arellano and Bond to address the issue of endogeneity.
 
Results
The results indicated that uncertainty is a key factor influencing company investment, with all four forms of uncertainty (company-specific uncertainty, market uncertainty, CAPM-based uncertainty, and economic uncertainty) having a positive and significant impact on corporate investment. Also, the results showed that cash flow intensifies the impact of firm-specific uncertainty and economic uncertainty on investment and reduces the impact of market uncertainty and CAPM-based uncertainty on investment. Therefore, a company's investment level depends not only on its uncertainty but also on the amount of its cash flow.
 
Conclusion
The results of the research confirm the views of the growth real option and the convex function of capital's marginal income, while disconfirming the views of the expectation real option, market structure, and production technology. The findings suggest that an increase in uncertainty encourages investment, as an early investment decision can enhance competitive advantage by gaining growth opportunities over other competitors. In addition, an early investment decision can help companies increase their market share and gain more profit. In other words, greater risk leads to more investment and, consequently, more reinvestment. This is because higher risk is associated with higher expected returns on investment, which in turn encourages greater reinvestment.

Keywords

Main Subjects

References

 
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(in Persian)
Financial Research Journal
Volume 26, Issue 4
2024
Pages 963-993

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