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Article
Publication date: 16 August 2011

Abdul Rashid

The purpose of this paper is to empirically examine the extent at which idiosyncratic and financial market uncertainty affect the UK private manufacturing firms'…

1057

Abstract

Purpose

The purpose of this paper is to empirically examine the extent at which idiosyncratic and financial market uncertainty affect the UK private manufacturing firms' investment decisions.

Design/methodology/approach

A firm‐level panel data covering the period from 1999 to 2008 drawn from the Financial Analysis Made Easy database was analyzed using the system‐generalized method of moments (GMM) technique to purge time‐invariant unobserved firm‐specific effects and to mitigate the potential endogeneity issues.

Findings

The results from the two‐step robust system‐GMM estimation indicate that firms significantly reduce their capital investment expenditures when uncertainty (measured by either form) increases. The findings also reveal that private firms' investment is more sensitive to idiosyncratic uncertainty than to financial market uncertainty. The results related to firm characteristics suggest that the firm‐specific variables such as debt‐to‐assets ratio, growth of sales and cash flow‐to‐assets ratio are also important in the determination of private firms' investment. The sensitivity analysis confirms that the findings are robust to an alternative method of estimation as well as to an alternative measure of idiosyncratic uncertainty.

Practical implications

The findings of the paper are useful for firms' investment decisions and authorities in designing effective fiscal and monetary policies.

Originality/value

The main value of this study is to investigate the effects of both idiosyncratic and financial market uncertainty on the investment decisions of private limited manufacturing firms.

Details

The Journal of Risk Finance, vol. 12 no. 4
Type: Research Article
ISSN: 1526-5943

Keywords

Book part
Publication date: 18 January 2022

Kajal Lahiri, Huaming Peng and Xuguang Simon Sheng

From the standpoint of a policy maker who has access to a number of expert forecasts, the uncertainty of a combined or ensemble forecast should be interpreted as that of a…

Abstract

From the standpoint of a policy maker who has access to a number of expert forecasts, the uncertainty of a combined or ensemble forecast should be interpreted as that of a typical forecaster randomly drawn from the pool. This uncertainty formula should incorporate forecaster discord, as justified by (i) disagreement as a component of combined forecast uncertainty, (ii) the model averaging literature, and (iii) central banks’ communication of uncertainty via fan charts. Using new statistics to test for the homogeneity of idiosyncratic errors under the joint limits with both T and n approaching infinity simultaneously, the authors find that some previously used measures can significantly underestimate the conceptually correct benchmark forecast uncertainty.

Details

Essays in Honor of M. Hashem Pesaran: Prediction and Macro Modeling
Type: Book
ISBN: 978-1-80262-062-7

Keywords

Article
Publication date: 9 January 2020

Justin S. Cox

The purpose of this paper is to examine how pre-IPO cash flow and earnings volatility influence both post-IPO pricing and valuation. This paper provides an empirical…

Abstract

Purpose

The purpose of this paper is to examine how pre-IPO cash flow and earnings volatility influence both post-IPO pricing and valuation. This paper provides an empirical extension of Pástor and Veronesi’s (2003, 2005) argument that uncertainty surrounding a private firm’s expected profitability can impact how the firm is valued in the IPO aftermarket.

Design/methodology/approach

This paper includes a sample of 695 IPOs between 1996 and 2011. Pre-IPO financial statement data are hand collected from the EDGAR database. Pre-IPO cash flow and earnings volatility is computed using the standard deviation of the firm’s three years of cash flows and earnings prior to the IPO. Tobin’s Q serves as a measure of post-IPO firm valuation. This paper includes two subsamples to account for the “hot” IPO market of the late 1990s.

Findings

Firms with higher pre-IPO cash flow volatility are associated with higher post-IPO aftermarket valuations. This result holds for both the “hot” IPO and the later sub-sample. Pre-IPO earnings volatility does not influence aftermarket valuations, suggesting that only the uncertainty surrounding cash flows serves as a salient measure to IPO investors. Finally, IPO underpricing is associated with pre-IPO cash flow volatility, suggesting another channel in which IPO pricing is influenced.

Research limitations/implications

The hand collection for this paper is laborious and is limited to yearly cash flow and earnings numbers. The paper documents that quarterly and yearly cash flow and earnings volatility measures are highly correlated for the select stocks that allow for such testing. Further, a broader sample that accounts for more international IPO issues might corroborate the findings in this paper.

Practical implications

This study shows that investors both initially price and value IPO firms base on their pre-IPO cash flow volatility.

Originality/value

This is the first paper to examine the direct link between pre-IPO cash flow and earnings volatility on IPO aftermarket valuation and IPO pricing.

Details

Managerial Finance, vol. 46 no. 1
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 5 June 2017

Weiwei Gao, Wanli Li and Zhen Huang

This paper aims to investigate whether family CEOs benefit investment efficiency under uncertainty with Chinese family firms and to test the moderating effect of ownership…

Abstract

Purpose

This paper aims to investigate whether family CEOs benefit investment efficiency under uncertainty with Chinese family firms and to test the moderating effect of ownership structure, including family ownership, the separation of family control from family ownership and the multiple large shareholder structure.

Design/methodology/approach

Fixed-effects models are designed for a sample of 5,734 firm-year observations for Chinese family firms from 2009 to 2014.

Findings

The results show that investment efficiency is low under uncertainty, and having family CEOs can reduce this negative relationship. Further analysis reveals that for firms with family CEOs, the negative effect of uncertainty on investment efficiency is weaker when the family has higher ownership, when family control is less separated from family ownership, or when family firms have multiple large shareholder structures.

Research limitations/implications

The authors do not distinguish founder-CEOs and descendant-CEOs. Most of Chinese family firms are still managed by founders, so the authors cannot explore the generation effect although different generations manage firms differently. Because family succession is becoming a more and more important problem in China, further research may be able to explore the generation effect.

Practical/implications

This paper suggests that in emerging economies with weak investor protection, outside minority shareholders can avoid expropriation from family owners by investing in firms with large family ownership, little separation of family control from ownership or multiple large shareholder structure. In addition, policymakers can encourage institutional investors to participate in family business to improve corporate governance.

Originality/value

Drawing on both Type I and Type II agency theory perspectives, the authors argue that although family CEOs can generally benefit firms’ investment efficiency, the benefits vary with firms’ ownership structure. In other words, family CEOs are not absolute agents or stewards but some extent of combination of both.

Details

Chinese Management Studies, vol. 11 no. 2
Type: Research Article
ISSN: 1750-614X

Keywords

Article
Publication date: 3 April 2017

Atreya Chakraborty, Christopher F. Baum and Boyan Liu

The purpose of this paper is to provide evidence on how firm-specific and macroeconomic uncertainty affects shareholders’ valuation of a firm’s cash holdings. This extends…

Abstract

Purpose

The purpose of this paper is to provide evidence on how firm-specific and macroeconomic uncertainty affects shareholders’ valuation of a firm’s cash holdings. This extends previous work on this issue by highlighting the importance of the source of uncertainty. The findings indicate that increases in firm-specific risk generally increase the value of cash while increases in macroeconomic risk generally decrease the value of cash. These findings are robust to alternative definitions of the unexpected change in cash. The authors extend the analysis to financially constrained and unconstrained firms.

Design/methodology/approach

The authors test the hypothesis that the marginal effect of cash holdings on excess stock returns is sensitive to uncertainty. To compute this marginal effect, the authors adopt and extend the approach of Faulkender and Wang (2006) to the authors’ more elaborate model.

Findings

The findings indicate that different sources of uncertainty affect the value of cash holdings differently. Findings indicate that increases in firm-specific risk generally increase the value of cash while increases in macroeconomic risk generally decrease the value of cash. These findings are robust to alternative definitions of the unexpected change in cash. The authors also extend the findings to financially constrained and unconstrained firms.

Originality/value

The findings indicate that the source of uncertainty firm-specific vs macroeconomic risk matters. The two sources of risk may have quite different effects on shareholders’ valuation of a firm’s cash holdings. Results from alternative sources of findings are new. These new findings are robust to alternative definitions of the unexpected change in cash.

Details

International Journal of Managerial Finance, vol. 13 no. 2
Type: Research Article
ISSN: 1743-9132

Keywords

Abstract

Details

Handbook of Transport Systems and Traffic Control
Type: Book
ISBN: 978-1-61-583246-0

Article
Publication date: 7 December 2015

Keming Li, Mohammad Riaz Uddin and J. David Diltz

Prior research has documented the role of information uncertainty in the cross-sectional variation in stock returns. Miller (1977) hypothesizes that if information…

1899

Abstract

Purpose

Prior research has documented the role of information uncertainty in the cross-sectional variation in stock returns. Miller (1977) hypothesizes that if information uncertainty is caused by differences of opinion, prices will reflect only the positive beliefs due to short-sale constraints. These anomalous stock price behaviors may result from mispricing. In contrast, Merton (1974) asserts that default risk is a function of the uncertainty in the asset value process. Information uncertainty may be subsumed by credit or default risk. The paper aims to discuss these issues.

Design/methodology/approach

The authors employ various sorting techniques and Fama-MacBeth Regressions to test the hypotheses.

Findings

The authors provide empirical evidence consistent with Merton’s (1974) default risk hypothesis and inconsistent with Miller’s (1977) mispricing hypothesis.

Research limitations/implications

Risk aversion and not misplacing is the primary factor driving information-related anomalies in equities markets.

Practical implications

It would be quite difficult to find arbitrage opportunities in equities markets because there appears to be little, if any, mis-pricing due to information uncertainties.

Originality/value

This study provides important information about the primary underlying information-related source of certain empirical anomalies in the cross-section of stock returns.

Details

Managerial Finance, vol. 41 no. 12
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 9 October 2017

Abdul Rashid and Muhammad Saeed

The purpose of this paper is twofold. First, based on the value optimization problem of the firm, the authors proposed a theoretical model for firms’ investment decisions…

1450

Abstract

Purpose

The purpose of this paper is twofold. First, based on the value optimization problem of the firm, the authors proposed a theoretical model for firms’ investment decisions, which incorporates the effects of both idiosyncratic (firm specific) and macroeconomic uncertainty/risk. Second, the authors empirically estimate the proposed model for Pakistan.

Design/methodology/approach

The authors utilize an unbalanced firm-level panel data covering the period 1988-2013. To generate time-variant firm-specific uncertainty, the authors estimate the autoregressive model on firm sales for each firm included in the sample over the examined period. Firm-specific risk is also measured based on the square of the residuals of firms’ sales. Two measures of macroeconomic uncertainty are computed using the conditional variance obtained by estimating the ARCH model for consumer price index and industrial production index. Several alternative measures of both types of uncertainties are used to ensure the robustness of uncertainty effects. To mitigate the problem of endogeneity, the robust two-step system-generalized method of moments estimator is used to estimate the empirical model.

Findings

The results indicate that firms are likely to cut down their level of investment spending when either type of uncertainty increases. The results also reveal that the sensitivity of firms’ investment decisions to macroeconomic (aggregate) uncertainty is higher as compared to the firm-specific uncertainty. The authors show that these findings are robust to different uncertainty measures used in the analysis. The results related to firm characteristics suggest that the firm-specific variables namely the debt to assets ratio, the costs of debt to assets ratio, and the sales to assets ratio are also equally important in the determination of investment decisions of corporate manufacturing firms.

Practical implications

The empirical findings of the paper are useful for firm managers, investors, and government authority. Specifically, the results help firm managers and investors to understand how firm-specific and macroeconomic uncertainty affects firms’ investment decisions. The finding that firms cut their investment spending in times of macroeconomic instability implies that declines in firms’ investment spending during the periods of macroeconomic turmoil may delay the process of recovery. Therefore, the policy makers should design such policies that encourage firms to invest more in economic crisis periods, which, in turn, would enhance the growth of the economy and help to overcome the problem of downturn/recession.

Originality/value

The authors first propose a theoretical model for firms’ investment decisions based on the value optimization problem of the firm by incorporating the role of both firm-specific and macroeconomic uncertainty. Next, unlike most of previous studies, they estimate the proposed model for non-financial firms operating in Pakistan. The authors predict that a higher exposure to both idiosyncratic and macroeconomic uncertainties leads to lower investment in Pakistani manufacturing firms. Further, the authors hypothesize that both types of uncertainties have differential effects on firms’ investment decisions.

Article
Publication date: 24 March 2021

Abdul Rashid, Assad Naim Nasimi and Rashid Naim Nasimi

The objective of this paper is threefold. First, it aims to empirically study whether firm-specific/idiosyncratic uncertainty, macroeconomic/aggregate uncertainty and…

Abstract

Purpose

The objective of this paper is threefold. First, it aims to empirically study whether firm-specific/idiosyncratic uncertainty, macroeconomic/aggregate uncertainty and political uncertainty have an adverse influence on firms' investment decisions in Pakistan. After establishing this, it scrutinizes whether the uncertainty effects on investment are different for firms of different sizes. Finally, it investigates whether any heterogeneity exists in the uncertainty impacts across different industries.

Design/methodology/approach

The empirical analysis is based on an unbalanced panel data of 468 nonfinancial firms listed at the Pakistan Stock Exchange (PSX) during the period 2000–2018. Departing from the literature, the paper builds a time-varying composite volatility/uncertainty index based on the principal component analysis (PCA) by utilizing the constructed volatility series for sales, cash flows and return on assets to gauge firm-specific uncertainty for each firm included in the analysis. Likewise, the paper develops a PCA-based composite index for macroeconomic uncertainty by using the conditional variance series of consumer price index (CPI), industrial production index (IPI), the interest rate and the exchange rate obtained by estimating the (generalized) autoregressive conditional heteroscedastic, (G)ARCH, models. Finally, political uncertainty is measured by political risk components maintained by the Political Risk Services Group. The empirical framework of the paper augments the standard investment equation by incorporating all three types of uncertainty. Firms are grouped into small, medium and large categories based on firms' total assets and the size indicators are generated. Next, the indicators are multiplied by each uncertainty measure to quantify the differential effects of uncertainty across firm size. Firms are also differentiated by sectors to explore the sector-based asymmetries in the uncertainty effects. The “robust two-step system generalized method of moments (2SYS GMM) (dynamic panel data) estimator” is applied to estimate the empirical models.

Findings

The results provide robust and strong evidence of the detrimental influence of all three types of uncertainty on investment. Yet, it is observed that the strength of the influence considerably varies across uncertainty types. In particular, compared to firm-specific uncertainty, both macroeconomic and political uncertainties have more unfavorable effects. The analysis also reveals that the effects of all three types of uncertainty are quite different at small, medium and large firms. Specifically, it is observed that although the investment of all firms is influenced adversely by magnified uncertainty, the adverse effects of all three kinds of uncertainty are quite stronger at small firms than medium and large firms. These findings support the phenomenon of size-based asymmetries in the effects of uncertainty on investment. The results also provide evidence that either type of uncertainty quite differently affects the investment policy of firms in different sectors.

Practical implications

The findings help different stakeholders to know how different types of uncertainty differently affect corporate firms' investments. Further, they suggest that firm size has a vital role in ascertaining the adverse effects of uncertainty on investment. The paper identifies to which type of uncertainty investors and policymakers should care more about and to which types of firms and industries they should concern more during volatile times. Firms should have more fixed assets and expand their size to mitigate the detrimental effects on investment of internal and external uncertainties. The government should enhance the political stability to induce firms for a higher level of investment, which, in turn, will result in higher growth of the economy.

Originality/value

The originality of the paper is credited to four aspects. First, unlike most previous studies that have utilized a single volatility measure, this paper constructs composite uncertainty indices based on the weights determined by the PCA. Second, it examines the effect of political uncertainty over and above the effects of idiosyncratic and aggregate (macroeconomic uncertainty) for an emerging economy. Third, and most important, it provides first-hand empirical evidence on the role of firm size in establishing the asymmetric effects of uncertainty on investment. Finally, it provides evidence on the industry-based heterogeneity in the uncertainty effects.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 21 June 2021

Lydie Myriam Marcelle Amelot and Ushad Subadar Agathee

The purpose of this study is to investigate the impact of idiosyncratic and macroeconomic risks on capital structure on SADC countries.

Abstract

Purpose

The purpose of this study is to investigate the impact of idiosyncratic and macroeconomic risks on capital structure on SADC countries.

Design/methodology/approach

Employing data from the African Financials database, the analysis is conducted over a ten year period spanning from 2009 to 2018 for 309 companies. Unit Root Fisher Chi-Square test and Granger Causality test were employed to test for unidirectional and bidirectional relationships cross-sectionally. To resolve endogeneity issues, System GMM was used as main topology for panel regression analysis.

Findings

The study confirmed that companies become risk averse when there is an increase in idiosyncratic and macroeconomic risk and therefore take less leverage. According to the perking order theory, a higher variability in earnings shows that the bankruptcy probability amplifies. Hence, institutions with high income employ more internal finance during periods of high idiosyncratic and macroeconomic uncertainty thereby lowering leverage. A positive significant and statistically relationship is also confirmed between idiosyncratic risk and leverage in Botswana, South Africa and Tanzania. Companies with higher leverage make riskier investment in line with the trade-off theory. In short, executives from the SADC region consider more importance to fluctuations in risk while accelerating or diminishing leverage in their capital structure.

Originality/value

The study is among one of the pioneering work underpinning the idiosyncratic risk and macroeconomic risk on capital structure and relying on a large number of companies across the SADC region. In this respect, it adds contribution to the existing literature on risks and capital structure to the socio-economic goals of the SADC region.

Details

African Journal of Economic and Management Studies, vol. 12 no. 3
Type: Research Article
ISSN: 2040-0705

Keywords

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