Exploring the role of uncertainty for corporate investment decisions in Germany

This paper studies the impact of sales uncertainty on firms'' investment outlays using the database of the Deutsche Bundesbank''s corporate balance sheet statistics. The sample used for estimation is a panel of 4''234 west German manufacturing firms with 33''217 observations, covering the years 1987-1997. In 1996, these firms accounted for 49.3% of the total turnover of German incorporated manufacturers. As uncertainty indicators, we construct firm-specific, time varying volatility measures. Using Within estimators and GMM techniques, we find a moderately strong and consistently negative effect of uncertainty on investment. If the uncertainty indicator is increased by one standard deviation, the predicted investment demand will fall by about 3.7 % of its mean.