This paper investigates investment policy of Israeli
firms using firm-level panel data. Major purpose of this research is to examine
the nature of investment-uncertainty relationship, relying on uncertainty proxy
built on firm-level panel. Uncertainty proxy is derived from stock market
conditional variance applying asymmetric GARCH models. The panel consists of 65
companies of several industries included in market index TA-100. The period of
the observation varies due to accessibility of financial reports: most of firms
are examined from last quarter of 1992 till second quarter of 2003. Implementing
asymmetric approach allows us to neutralize the disturbances caused by
so-called “asymmetric volatility” phenomena which assume different reaction of
volatility to market’s ups and downs. The analysis of the data is performed on
two levels: general and firm-level. The general approach implements cross-section time series analysis for a standard
accelerator investment model with controlling for uncertainty proxy. The coefficient for uncertainty proxy
appears to be negative with high significance. Extending the research by estimating the investment on firm-level panel
by VAR model, suggests ambiguous investment-uncertainty relationship. Further
analysis of the data by binary models (extreme value or Gompertz function)
verifies highly significant negative effect of uncertainty on investment. The
nature of this effect is non-linear and demonstrates different uncertainty
thresholds due to the firms’ financial characteristics. Firms with more
financial stability appear to be less risky in their investment policy and have
lower uncertainty thresholds than firms with unstable or developing financial
structure.
