Uncertainty and investment of Dutch firms: an empirical analysis using stock market data

This paper examines the investment-uncertainty relationship for a panel of Dutch firms. The uncertainty proxy is derived from daily stock market prices of individual firms. We show that some macro indicators, in combination with firm fixed effects, are able to give a reasonable explanation of the uncertainty a firm is faced with, and hence can be used to extract the exogenous component of uncertainty. The investment-uncertainty relationship appears to be non-linear: for low levels of uncertainty there is a positive effect on investment, whereas for high levels of uncertainty the effect becomes negative.