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1. Introduction
Certainly, several firm-specific, industry-specific, market-specific and macroeconomic factors are significant in determining the level of corporate investment. However, uncertainty associated with firm-specific variables and macroeconomic conditions has also a significant impact on firms' investment decisions. Indeed, both theorists and empiricists have argued that different types of uncertainty have a substantial role to play in the determination of firms' investments.
Theoretical literature has acknowledged many channels through which the investment decisions of firms can be influenced by uncertainty. In fact, different studies have predicted different magnitudes and signs of uncertainty effects on investment. These differences are mainly due to the underlying assumptions related to cost functions, revenue functions and the nature and the level of competition in the product market. Likewise, in the empirical literature, there is also no consensus regarding the sign of the impact of uncertainty on the corporate investment policy. There is also an open debate regarding the effect of different types of uncertainty on the investment decisions of firms. The sign and significance of the uncertainty effect on firm investment policy largely depend on the channel through which the uncertainty effects transmit to firms' investment policy.
The economic theory identifies several channels through which uncertainty may influence corporate investment (Ghosal and Loungani, 2000). These channels include the irreversibility of capital expenditures due to sunk costs (Dixit and Pindyck, 1994), financing constraints that may arise from asymmetries between borrowers and lenders (Greenwald and Stiglitz, 1990), firms' attitudes concerning risks (Appelbaum and Katz, 1986), and the convexity of the marginal product of capital (Hartman, 1972; Abel, 1983). The first three channels largely predict a negative sign for the investment–uncertainty relationship, whereas, the latter channel anticipates the positive. However, when we review the empirical as well as theoretical literature we find that there is no consensus among the scholars on the sign of the uncertainty–investment nexus.
Some theoretical studies predict the positive impact of uncertainties that corporate firms face in their operations and the investment decisions of firms (Hartman, 1972; Abel, 1983; Baum et al., 2010). The positive impact is mainly justified based on the assumption of the convex marginal revenue product function. On the contrary, several studies have negatively related firm investment to uncertainties (Brainard et al., 1980; Aizenman and...