Uncertainty and Investment: Evidence from Australian Firm Panel Data

This paper investigates the key drivers of fixed firm investment of listed non-financial companies in Australia over the period from 1987 to 2009. A Tobin's q model of investment is augmented to account for the effect of economic uncertainty on the investment decision. The effects of Tobin's q, sales and cash flows on firm investment rate are also analysed and discussed. Consistent with existing literature, this research finds clear evidence of negative effects of both macroeconomic and firm idiosyncratic uncertainty on Australian firm investment. However, evidence also shows that firm-specific uncertainty is more important in explaining firm investment than macroeconomic uncertainty.