The impact of financial crises and tolerance for uncertainty

Financial crises can have severe negative effects on investment. One reason for this is that financial crises increase uncertainty, increasing the real option value of delaying investment. In this paper, we show that the negative effect of crises on investment differs significantly across countries: in countries with low tolerance for uncertainty, the negative effect is strong. The negative effect is absent in countries that are more tolerant of uncertainty. These findings are similar across different types of financial crisis; they vary as predicted across type of investor, asset and industry; and they are not driven by uncertainty-averse countries adopting more rigid institutions.

[1]  P. Lane,et al.  The External Wealth of Nations Mark Ii: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004 , 2006, SSRN Electronic Journal.

[2]  A. Falk,et al.  Individual Risk Attitudes: Measurement, Determinants and Behavioral Consequences , 2009 .

[3]  Daniel A. Kaufmann,et al.  The Worldwide Governance Indicators: Methodology and Analytical Issues , 2010 .

[4]  N. Bloom.  The Impact of Uncertainty Shocks , 2007 .

[5]  Daniela Klingebiel,et al.  Appendix: Banking Crisis Database , 2005 .

[6]  Jeffrey A. Frankel,et al.  Preventing Currency Crises in Emerging Markets , 2002 .

[7]  P. Lane,et al.  The External Wealth of Nations Mark II , 2006 .

[8]  Andrei Shleifer,et al.  The Quality of Goverment , 1998 .

[9]  R. Feenstra,et al.  World Trade Flows: 1962-2000 , 2005 .

[10]  R. Blundell,et al.  Initial Conditions and Moment Restrictions in Dynamic Panel Data Models , 1998 .

[11]  Jeffrey A. Frankel,et al.  Managing Currency Crises in Emerging Markets , 2003 .

[12]  Luc Laeven,et al.  Systemic Banking Crises: A New Database , 2008, SSRN Electronic Journal.

[13]  Rocco Huang,et al.  Tolerance For Uncertainty and the Growth of Informationally Opaque Industries , 2008 .

[14]  E. Davis,et al.  Corporate Financial Structure and Financial Stability , 2004, SSRN Electronic Journal.

[15]  E. Rosenbaum,et al.  The Wealth and Poverty of Nations , 1958 .

[16]  Christophe Kamps.  New Estimates of Government Net Capital Stocks for 22 OECD Countries 1960-2001 , 2004 .

[17]  Luis-Fernando Mejia,et al.  On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects , 2004 .

[18]  Peter Eickelberg.  A Cultural Explanation of the Foreign Bias in International Asset Allocation , 2010 .

[19]  S. Hewa.  Medical technology: A pandora's box? , 1994, The Journal of medical humanities.

[20]  Barbara M. Fraumeni,et al.  The Measurement of Depreciation in the U.S. National Income and Product Accounts , 1997 .

[21]  Julia K. Thomas.  Is Lumpy Investment Relevant for the Business Cycle? , 2002, Journal of Political Economy.

[22]  N. Bloom,et al.  Uncertainty and Investment Dynamics , 2006 .

[23]  Eduardo S. Schwartz,et al.  Investment Under Uncertainty. , 1994 .

[24]  Susan M. Collins,et al.  Capital Flows to Developing Economies: Implications for Saving and Investment , 1999 .

[25]  T. Beck,et al.  A New Database on Financial Development and Structure , 1999 .

[26]  T. Beck,et al.  A New Database on the Structure and Development of the Financial Sector , 2000 .

[27]  C. Kirk Hadaway,et al.  World Christian Encyclopedia , 2013 .

[28]  J. Joyce,et al.  Sudden Stops, Banking Crises and Investment Collapses in Emerging Markets , 2009 .

[29]  E. Swanson,et al.  World development indicators 2007 , 2006 .

[30]  M. Arellano,et al.  Another look at the instrumental variable estimation of error-components models , 1995 .

[31]  Miles S. Kimball,et al.  Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey , 1995 .

[32]  A. Rose,et al.  Currency Crashes in Emerging Markets : An Empirical Treatment , 1996 .

[33]  Andrei Shleifer,et al.  Courts: The Lex Mundi Project , 2002 .

[34]  Thomas Brambor,et al.  Understanding Interaction Models: Improving Empirical Analyses , 2006, Political Analysis.

[35]  Andrei Shleifer,et al.  Judicial Checks and Balances , 2003, Journal of Political Economy.

[36]  M. Arellano,et al.  Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations , 1991 .

[37]  Evelina M. Tainer.  National Income and Product Accounts , 2012 .

[38]  B. Tieben,et al.  The Impact of Uncertainty , 2012 .

[39]  The Regulation of Labor , 2003 .

[40]  Domestic Commerce,et al.  Survey of current business , 1921 .

[41]  Alan A. Carruth,et al.  What Do We Know about Investment under Uncertainty , 2000 .

[42]  G. Hofstede.  Culture′s Consequences: Comparing Values, Behaviors, Institutions and Organizations Across Nations , 2001 .

[43]  P. Honohan,et al.  Systemic financial crises: Containment and resolution , 2005 .

[44]  S. Edwards.  Does the Current Account Matter? , 2001 .

[45]  Timo Välilä,et al.  Public Investment in Europe: Evolution and Determinants in perspective* , 2006 .

[46]  Mary O'Mahony,et al.  Output, Input and Productivity Measures at the Industry Level: The EU KLEMS Database , 2009 .

[47]  C. Kwok,et al.  National culture and financial systems , 2006 .

[48]  G. Hofstede,et al.  Culture′s Consequences: International Differences in Work-Related Values , 1980 .