Effect of uncertainty on corporate investment: evidence from Kenyan`s NSE listed firms

Abstract

This study examines the effects of uncertainty on corporate investment in Kenya. The main motivation of the study is to test whether uncertainty depresses or accelerates investments based on the real option and strategic growth theories. The study uses firm-level data of non-financial listed firms from company’s financial reports and Nairobi Securities Exchange (NSE) for the period 2000-2016. Standard panel data estimators are used to examine the effects over the period. Uncertainty being a variable of interest is obtained from daily stock market prices by applying the Generalized Autoregressive Heteroscedasticity, GARCH (1,1) technique. The study also uses the standard deviation of daily stock market prices to model uncertainty for robustness purposes. Use of daily stock market prices to model uncertainty is informed by the efficient market hypothesis. Our estimates result suggest that uncertainty has a positive effect on investments. This result is consistent with the strategic growth options theory of investment.