Exploring the role of uncertainty for corporate investment decisions in Germany

The impact of uncertainty on firms? investment outlays is subject to an ongoing debate. Theory identifies several channels. Irreversibility, financing constraints and risk aversion make a negative relationship between uncertainty and investment likely. On the other hand, the ability of firms to adapt after uncertainty is resolved can make a risky strategy more attractive. Therefore, risk may also constitute an incentive to invest. The net effect is theoretically indeterminate. The empirical literature has not yet been able to settle the question. This paper studies the impact of uncertainty on firm?s investment outlays using the database of the Deutsche Bundesbank's corporate balance sheet statistics. Our database represents roughly 75% of the total turnover of the west German manufacturing sector. The sample used for estimation contains 6,745 firms with almost 50,000 observations, covering the years 1987 - 1997. This is a period long enough to generate measures of uncertainty specific to both firm and time. Using panel econometric methods, we estimate the effect of sales uncertainty and cost uncertainty on investment demand. We obtain two key results. First, there is a moderately strong and consistently negative effect of uncertainty on investment. If both uncertainty indicators are increased by one standard deviation, the estimated investment demand will fall by 6?% of its mean. Furthermore, it emerges that sales uncertainty and cost uncertainty are of equal importance for investment: both our indicators contribute about 3 percentage points to the total reduction of investment. -- Der Einfluss von Unsicherheit auf das Investitionsverhalten von Unternehmen ist Gegenstand einer fortdauernden Diskussion. Theoretische Überlegungen zeigen eine Reihe möglicher Kanäle auf. Einerseits lassen Irreversibilitäten, Finanzierungsrestriktionen und Risikoaversion eine dämpfende Wirkung erwarten. Auf der anderen Seite kann die Fähigkeit von Unternehmen, sich nach Auflösung der Unsicherheit den neuen Gegebenheiten in optimaler Weise anzupassen, risikoreichere Alternativen vorteilhaft erscheinen lassen. Daher kann Risiko einen eigenständigen Investitionsanreiz darstellen. Die Gesamtwirkung ist theoretisch unbestimmt. Auch die empirische Literatur ist bislang nicht zu einhelligen Ergebnissen gekommen. In dieser Arbeit wird der Einfluss von Unsicherheit auf das Investitionsverhalten mit Hilfe der Unternehmensbilanzdaten der Deutschen Bundesbank untersucht. Unser Datenbestand repräsentiert etwa 75% des gesamten Umsatzes im westdeutschen Verarbeitenden Gewerbe. Die hieraus erzeugte Stichprobe enthält 6 745 Firmen mit fast 50 000 Beobachtungen aus den Jahren 1987 - 1997. Der Zeitraum ist groß genug, um Unsicherheitsmaße zu gewinnen, die nicht nur unternehmensspezifisch sind, sondern auch in der Zeit variieren. Mit Hilfe panelökonometrischer Verfahren wird die Wirkung von Erlösunsicherheit und Kostenunsicherheit auf die Investitionsnachfrage untersucht. Hierbei ergeben sich zwei wichtige Resultate. Zum einen übt Unsicherheit einen eindeutig negativen Effekt mittlerer Stärke aus. Erhöht man beide Unsicherheitsindikatoren jeweils um eine Standardabweichung, so verringert sich die geschätzte Investitionsnachfrage hierdurch um 6?% des Mittelwerts. Weiterhin zeigt sich, daß Absatz- und Kostenunsicherheit für die Investitionsnachfrage von gleicher Bedeutung sind: Beide Indikatoren tragen rund 3 Prozentpunkte zu dem geschätzten Investitionsrückgang bei.Investition,Unsicherheit,Panelökonometrie,Investment,Uncertainty,Panel Estimation

Monetary transmission in Germany: New Perspectives on Financial Constraints and Investment Spending

In order to obtain a better understanding of monetary transmission, this paper assesses the importance of the interest rate and credit channels on business fixed investment in the German manufacturing sector. Our panel of financial statements contains 44,345 observations for 6,408 firms. We uncover a rather solid interest channel. A transitory increase in nominal interest rates by 100 basis points would depress investment demand by almost 4% within the first year. Using our direct measure of creditworthiness, we can also document a balance-sheet channel. Relative to unconstrained firms, financially constrained firms exhibit increased sensitivity to internal funds, and decreased sensitivity to the user cost as well as to market demand. Furthermore, changes in the rating of firms seem to affect investment demand in a way that is consistent with the presence of a balance-sheet channel. Quantitatively, however, this balance-sheet channel seems to be of secondary importance. -- Mit Hinblick auf ein besseres Verständnis der monetären Transmission wird hier die Bedeutung des Zinskanals und des Kreditkanals für die Anlageinvestitionen des Verarbeitenden Gewerbes in Deutschland untersucht. Unser Panel von Jahresabschlüssen enthält 44 345 Beobachtungen aus 6 408 Unternehmen. Es kann ein recht kräftiger Zinskanal isoliert werden. Eine transitorische Erhöhung der Nominalzinsen um 100 Basispunkte könnte die Investitionsnachfrage im Laufe eines Jahres um fast 4% drücken. Mit Hilfe eines direkten Maßes für Kreditwürdigkeit können wir außerdem einen Unternehmensbilanzkanal nachweisen. Im Vergleich zu anderen Firmen weisen finanziell beschränkte Unternehmen eine erhöhte Sensitivität für interne Liquidität auf, sowie eine geringere Reagibilität bezüglich der Kapitalnutzungskosten und der Nachfrage. Weiterhin paßt die Wirkung einer Änderung des Unternehmensratings auf die Investitionsnachfrage zu einem wirksamen Unternehmensbilanzkanal. Jedoch scheint letzterer quantitativ von nachgeordneter Bedeutung zu sein.Monetäre Transmission,Investition,Kapitalnutzungskosten,finanzielle Restriktionen,Kreditkanal,Monetary Transmission,Firm Investment,User Cost,Finance Constraints,Credit Channel

Monetary transmission in Germany: new perspectives on financial constraints and investment spending

In order to obtain a better understanding of the transmission channels for monetary policy, this paper assesses the importance of the interest rate and credit channels on business fixed investment in Germany. Our unbalanced panel of financial statements contains 44,345 firm/year observations for 6,408 firms. We uncover a rather solid interest channel. A transitory increase in nominal interest rates by 100 basis points would depress investment demand by almost 4% within the first year. Using our direct measure of creditworthiness, we can also document a balance-sheet channel. Relative to unconstrained firms, financially constrained firms exhibit increased sensitivity to internal funds, and decreased sensitivity to the user cost as well as to market demand. Furthermore, changes in the rating of firms seem to affect investment demand in a way that is consistent with the presence of a balance-sheet channel. This balance-sheet channel, however, seems to be of secondary importance JEL Classification: E5, E2finance, firm investment, monetary transmission, user cost

Financing constraints, firm level adjustment of capital and aggregate implications

Following a positive shock, financing constraints will prolong or impede economic expansion that would have been optimal in an unconstrained environment. The study of dynamic adjustment therefore offers a direct way of verifying the presence of financing constraints and assessing their consequences for economic allocation. This paper compares the speed of adjustment of constrained and unconstrained firms using categorical information from survey data on the restrictions under which adjustment takes place. A set of moment conditions for the use in GMM estimation is developed, to cope with the problem of time varying speed of adjustment when the target level is partially unobserved. After estimating the micro-dynamics of capital demand, I show that the changing composition of the population makes for a time-varying sensitivity of the aggregate with respect to macroeconomic shocks. -- Wegen informationeller Friktionen, Unteilbarkeiten und Irreversibilitäten ist die Reaktion der aggregierten Faktornachfrage auf sektorale Schocks im Zeitablauf nicht unveränderlich. Sie wird vielmehr von der Verteilung der Firmen abhängen. Wenn viele Unternehmen sich in einem Zustand befinden, der eine rasche Reaktion erlaubt oder erzwingt, ist die Sensitivität hinsichtlich expansiver Schocks besonders groß. Aus diesem Grund sind direkte Informationen über die Position der Unternehmen von hohem Wert, da sie einen Aufschluss über die Sensitivität des Unternehmenssektors als Ganzem geben können. Diese Arbeit stellt heraus, dass Umfragedaten eine wichtige und zeitnahe Informationsquelle hinsichtlich der relevanten Beschränkungen für Individuen sein können. Es wird spezifisch die Bedeutung von Finanzierungsrestriktionen für die Anpassungsgeschwindigkeit auf der Mikroebene und deren Folgen für das Aggregat behandelt.Financing constraints,adjustment,dynamic panel data models

Social Learning in Dualistic Societies : Segregation, Growth and Distribution

Using a simple model of social learning, we endogenize growth and distribution in a dualistic developing society. For given parameters of the learning technology, a trade-off between growth and equity results. On the other hand, more intensive social interaction between agents will raise the growth rate and lower the income differential at the same time. The economic consequences of lacking social integration are sluggish growth and high inequality

Social Interactions - Is There Really an Identification Problem?

It is an everyday experience that the behavior of individuals belonging to the same social group tends to be correlated. In his seminal work, Manski differentiates two basic types of feedback between group and individual and he maintains that it is not possible to discriminate between the two by mere observation. What is more: Only under very favorable conditions can social effects be distinguished from other reasons for correlations within social groups, such as selectivity. Manski's forceful critique challenges not only the numerous empirical efforts to understand the nature of social interactions. In the light of his arguments many theoretical disputes in the social sciences suddenly appear to be rather futile. Thus, a further analysis of his position seems well justified. The result is quite encouraging. Manski himself renders the solution to his identification problem impossible by imposing a very special assumption. In his econometric model, social effects do not flow from the outcomes realized within the group, but from their respective conditional mathematical expectations. By substituting this critical assumption by a more realistic formulation, a fully identified model is obtained. For this modified model, FIML estimators of all parameters are explicitly derived. The new estimator allows to differentiate clearly between endogenous social effects, exogenous social effects and correlated effects

Bubbles and incentives: A post-mortem of the Neuer Markt in Germany

This paper aims to shed light on some of the major allocative consequences of financial market bubbles. In March 1997, the Neuer Markt in Germany opened. Six years later, in June 2003, it closed forever. In the interim period lay the spectacular rise and fall of the first and most important European market for hi-tech stocks. Given investors' frenzy, the Neuer Markt was a special kind of natural experiment. For some time, financing constraints were virtually non-existent. Our model of corporate financing shows that bubbles on financial markets will induce entrepreneurs and providers of external finance to enter the 'wrong' contract. Incentive compatibility constraints designed to guarantee that corporate decision-makers behave constructively turn out to be invalid, and managers will know this before shareholders do. Thus, faulty valuation by stock markets may directly induce destructive corporate behaviour: slack, empire building, excessive risk-taking, and fraud. At the time of the IPO, a huge amount of liquidity is injected into the companies, and a dynamic analysis of the balance sheet ratios and income statement items in the following years can teach us the ways in which this liquidity is diffused. We analyse the corresponding dynamics of total assets, tangible assets and equity, as well as the evolution of sales and profits for 204 German non-financial companies out of a total of 326 companies that had their IPO at the Neuer Markt. On the basis of consecutive annual accounts, we retrace the events using a dynamic flow of funds analysis. We assess the explanatory power of our model using non-parametric methods [Median tests, Wilcoxon-Mann-Whitney tests, Kolmogorov-Smirnov tests] and quantile regressions. Our results indicate that valuation has strong and systematic effects on incentives. Experience, as proxied by age at IPO, is shown to have a beneficial effect, whereas support by VC and PE firms does not seem to matter for the success of the enterprises considered. --Bubbles,corporate governance,quantile regressions,nonparametric statistics

Dependence on External Finance by Manufacturing Sector: Examining the Measure and its Properties

Rajan & Zingales (1998) use U.S. Compustat firm data for the 1980s to obtain measures of manufacturing sectors’ Dependence on External Finance (DEF). They take any differences in these measures to be structural/technological and thus applicable to other countries. Their joint assumptions about how to obtain representative values of DEF by sector and about why these values differ between sectors have been used widely to show that sectors benefit unequally from a country’s level of financial development. However, the assumptions as such have not been examined. The present study, conducted with cyclically adjusted annual DEF measures, attempts to do so using U.S. industry data for 1977-1997 aggregated by sector. The key findings are that structural/ technological variables have low explanatory power for DEF and that the DEF figures calculated from micro data do not correspond closely to what is obtained from aggregate data. Hence assumptions crucial for RZ's argumentation have not been validated.Growth and finance, financial development, industry structure