Exchange rate volatility, uncertainty, and corporate investment : background note for the South Africa systematic country diagnostic

This study investigates the determinants of corporate investment decisions, using a sample of listed South African firms and panel GMM estimators. The authors provide evidence that, along with firm-specific characteristics, exchange rate volatility and idiosyncratic volatility also influence firms’ capital expenditures. The authors find that exchange rate volatility is inversely related with investment, even after accounting for the impact of uncertainty. Particularly for uncertainty, the authors find that only idiosyncratic volatility influences investment and their relationship is positive. This result is instructive, as it suggests that cross-country differences in the idiosyncratic risk-investment nexus can be assessed vis-a-vis the presence of mark-ups and the degree of market concentration. This study is a background note for the South Africa systematic country diagnostic.