Working PapersThis thesis contributes to the empirical research about how uncertainty affects firm-level investment behaviour and capital accumulation using a structural econometric approach. This paper develops a structural framework to estimate the effects of uncertainty on investment behaviour and capital accumulation at the firm level. Our model allows uncertainty to affect investment through three possible channels: the Hartman-Abel-Caballero effect; different forms of capital adjustment costs; and a risk premium component in the discount rate. We discuss identification of these three distinct effects, and allow for unobserved heterogeneity in both firm size and growth. Parameters are estimated using simulated method of moments, matching empirical data for UK manufacturing firms. The estimated model indicates that higher uncertainty reduces both firm size and capital intensity in the long run, primarily through the discount rate effect. This paper presents estimates of the effects of uncertainty on both short run investment behaviour and long run capital accumulation for panels of African and Asian firms. We estimate structural investment models in which the level of uncertainty influences investment behaviour through different forms of adjustment costs: partial irreversibility, a fixed cost of undertaking any investment at all, and quadratic adjustment costs. Structural parameters are estimated by matching simulated model moments to empirical data for firms in China, India, Morocco and Ghana, using a simulated minimum distance estimator. The estimated models suggest that a lower level of uncertainty would have only modest effects on short run investment dynamics, but would result in much higher capital stocks. This paper uses numerical dynamic programming methods to replicate the analytical results in Abel and Eberly (1999) about the effects of uncertainty on capital accumulation under complete irreversibility. We then analyse the effects of uncertainty in the presence of other forms of adjustment costs: partial irreversibility, fixed costs and convex adjustment costs. Our numerical results show that a higher level of uncertainty tends to reduce expected capital stock levels in a model with strictly convex adjustment costs. Simulations suggest that this negative impact of uncertainty on capital accumulation may be substantial. We also provide some intuition for this result. In the past four decades there has been considerable interest in the effects that uncertainty has on a firm's investment decision and the resulted capital accumulation. This chapter surveys consensus, controversies and open questions in the literature under a general dynamic programming framework. We illustrate that the key answers to the effects of uncertainty depend on the forms of adjustment costs, the properties of operating profit and the quantities of interest. In particular, two special combinations of adjustment costs and operating profits are investigated to see why some well-known controversies have aroused; and whether each of them could provide unambiguous predictions on all the quantities of our interest. Finally, we highlight the necessity of a structural estimation to answer the part that we do not know yet. In this paper we use panel data on firms from Brazil and China to investigate the role of financial constraints for borrowing and investment. We develop a structural investment-debt-finance model, in which borrowing is costly but sometimes necessary to finance investment. Structural parameters are estimated by matching simulated model moments to empirical data moments, using a simulated minimum distance estimator. The estimated models suggest that the likelihood of being financially constrained is about 0.45 for Brazil and 0.33 for China. Our analysis also shows that although financing constraint does not necessarily lead to lower capital stock levels due to precautionary saving, it does lead to allocating inefficiency in investment. Hence a reduction in the cost of external financing would have significant effects on both investment and borrowing. Whether the sensitivity of a firm's investment to its own cash flow is a useful indicator of the presence of financing constraints is a controversial question in the investment literature. In this thesis, we investigate this issue using both real investment data from a panel of Chinese manufacturing firms and simulated data from calibrated dynamic models for optimal investment and financial decisions. Our analysis of simulated data highlights the danger that significant coefficients on cash flow variables may be produced, in the absence of financing constraints, by plausible forms of model mis-specification. In particular, the omission of relevant non-linear terms from reduced form investment models can have this effect.
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