Finance Seminar（2016-12）

Topic: The Real and Financial Impact of Uncertainty Shocks

Speaker: Xiaoji Lin, the Ohio State University

Time: Wednesday, 18 May, 10:00-11:30

Place: Room 217, Guanghua Building 2

Abstract:

We show theoretically and empirically how real and financial frictions amplify the impact of uncertainty shocks on firms’ investment, employment, debt (term structure of debt growth), and cash holding. We start by building a model with real and financial frictions, alongside uncertainty shocks, and show how adding financial frictions to the model almost doubles the negative impact of uncertainty shocks on investment and hiring. The reason is higher uncertainty induces the standard negative real-options effects on the demand for capital and labor, but also leads firms to hoard cash and cut debt to hedge against future shocks, further reducing investment and hiring. We then test the model using a panel of US firms and a novel instrumentation strategy for uncertainty exploiting differential firm exposure to exchange rate and factor price volatility. We find that higher uncertainty significantly reduces real investment and hiring, while also leading firms to take a more cautious financial position by increasing cash holdings and cutting debt, dividends and stock-buy backs. This highlights not only the importance of financial frictions for amplifying the impact of uncertainty shocks, but how in periods with greater financial frictions .like during the global-financial-crisis .uncertainty can be particularly damaging.

Introduction:

Dr. Xiaoji Lin is an assistant professor of finance in Ohio State University. Before joining Ohio State, Dr. Xiaoji Lin taught at London School of Economics and Political Science. His research fields include asset pricing and macroeconomics. Dr. Lin has published at leading academic journals includingJournal of Financial EconomicsandReview of Financial Studies. His doctoral thesis won the Trefftzs award at 2008 Western Finance Association annual meetings.

//fisher.osu.edu/departments/finance/faculty/xiaoji-lin/

Your participation is warmly welcomed!