Uncertainty, Capital Investment, and Risk Management∗

We examine the simultaneous effects of uncertainty on firm-level capital investment and risk management, using forward-looking and exogenous measures of output price uncertainty. The effect of uncertainty on capital investment varies with firms ’ hedg-ing strategy, and firm size plays a pivotal role in these effects. When faced with high price uncertainty, large firms increase their hedging intensity but do not lower capi-tal investment or net debt issuance, whereas small firms do not adjust their hedging intensity but significantly lower capital expenditure and net debt issuance. Our anal-ysis highlights the importance of considering risk management while examining the uncertainty-investment relationship