The Inverted-U hypothesis for the effect of uncertainty on investment: Evidence from UK firms

Abstract

This paper offers the first attempt to test the inverted-U hypothesis for the effect of uncertainty on investment, implied by a number of recent theoretical studies, using a panel of UK firms. It is found that the effect of uncertainty on corporate investment is indeed approximated by an inverted-U shaped relationship: at low levels of uncertainty the effect is positive, but it becomes negative at high levels of uncertainty. This result represents the first empirical verification of the hypothesis with respect to UK firms.     

Financial Development, Uncertainty and Economic Growth

By performing a cross-country growth regression for the 1970-1998 period this paper finds evidence for the fact that the impact of policy uncertainty on economic growth depends on the development of the financial sector. It appears that a higher level of financial development partly mitigates the negative impact of policy uncertainty on economic growth. This clearly indicates the relevance of financial sector development.     

The magnitude and determinants of capital flight: The case for six sub-Saharan African countries

Summary Most studies treat capital flight as an exclusively Latin American problem. This paper estimates capital flight for six African countries and shows that the emphasis on Latin American capital flight is not correct. It appears that the burden of capital flight is also important for many African countries. Moreover, this paper tries to find some determinants for the African countries' capital flight. The increase of government and government-guaranteed foreign debt and the overvaluation of the real exchange rate appear to be the most important explanatory factors of capital flight for the African countries in this study.The authors would like to thank Peter van Bergeijk, Richard Brown, Nanne Brunia, Richard Gigengack, Ger Lanjouw, the participants of the Development Economics Seminar, March 1992, Institute of Social Studies, The Hague, and an anonymous referee for their useful comments.     

Uncertainty and Financing Constraints

Using a panel of Dutch listed firms this paper provides empirical evidence for the hypothesis that more risky firms are confronted with more severe capital market constraints than relatively less risky firms. The paper also contributes to the discussion on the usefulness of cash flow as a measure of financial constraints. We present a stochastic version of the Kaplan-Zingales (1997) model. We show that cash flow sensitivity can be used as a meaningful indicator of financing constraints if firms are classified by the degree of uncertainty they face and if the uncertainty originates from cost uncertainty.     

International diversification and Microfinance

International commercial banks, institutional investors, and private investors have become increasingly interested in financing microfinance institutions (MFIs). This paper investigates whether adding microfinance funds to a portfolio of risky international assets yields diversification gains. By using mean-variance spanning tests with short-sale constraints, we find that investing in microfinance may be attractive for investors seeking a better risk-return profile. Specifically, the analysis suggests that investing in MFIs from Latin America, or microfinance and rural banks yields more efficient portfolios. In contrast, adding MFIs from Africa or microfinance NGOs to a portfolio of international assets is not beneficial for a mean-variance investor.     

A practical approach to validating a PD model

The capital adequacy framework Basel II aims to promote the adoption of stronger risk management practices by the banking industry. The implementation makes validation of credit risk models more important. Lenders therefore need a validation methodology to convince their supervisors that their credit scoring models are performing well. In this paper we take up the challenge to propose and implement a simple validation methodology that can be used by banks to validate their credit risk modelling exercise. We will contextualise the proposed methodology by applying it to a default model of mortgage loans of a commercial bank in the Netherlands.