Managerial flexibility, uncertainty, and corporate investment: The real options effect

This paper examines how changes in uncertainty affect corporate investment and how managerial flexibility influences this effect. Consistent with existing evidence, this study shows that increased uncertainty reduces a firm's capital expenditures even after controlling for investment opportunities and fund availability. It further shows that the negative effect of increased uncertainty on corporate investment is more pronounced for firms with fewer financial constraints and larger size. Overall, the results suggest that managerial flexibility proxied by certain firm characteristics affects the negative relation between uncertainty and investment. (C) 2008 Elsevier Inc. All rights reserved.