Abstract:

The paper uses panel data on Ugandan firms and a measure of idiosyncratic uncertainty to determine the nature of investment sensitivity to changes in perceived uncertainty among firms with different degrees of investment reversibility. Using a sample selection technique to fit a modified version of an accelerator model, the paper yielded results consistent with predictions of theories of irreversible investment. The results indicate a negative relationship between uncertainty and investment. Findings also indicate that uncertainty has a greater
negative effect on investment for firms with less reversible investment.