The Finance Uncertainty Multiplier

Ivan Alfaro, Nicholas Bloom and Xiaoji Lin
Additional contact information
Ivan Alfaro: BI Norwegian Business School

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We show how real and financial frictions amplify the impact of uncertainty shocks. We start by building a model with real frictions, and show how adding financial frictions roughly doubles the negative impact of uncertainty shocks. The reason is higher uncertainty alongside financial frictions induces the standard negative real-options effects on the demand for capital and labor, but also leads firms to hoard cash against future shocks, further reducing investment and hiring. We then test the model using a panel of US firms and a novel instrumentation strategy for uncertainty exploiting differential firm exposure to exchange rate and factor price volatility. Consistent with the model we find that higher uncertainty reduces firms' investment, hiring, while increasing their cash holdings and cutting their dividend payouts, particularly for financially constrained firms. This highlights why in periods with greater financial frictions--like during the global-financial-crisis--uncertainty can be particularly damaging.

JEL-codes: D22 E23 E44 G32 (search for similar items in EconPapers)
Date: 2017-12
New Economics Papers: this item is included in nep-cfn, nep-dge, nep-mac and nep-pke
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID3 ... ctid=3093871&mirid=1

Related works:
Journal Article: The Finance Uncertainty Multiplier (2024)
Working Paper: The Finance Uncertainty Multiplier (2023)
Working Paper: The Finance Uncertainty Multiplier (2018)
Working Paper: The Finance-Uncertainty Multiplier (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2017-30

Access Statistics for this paper

More papers in Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics Contact information at EDIRC.
Bibliographic data for series maintained by ().