The Sensitivity Effect of Uncertainty on Corporate Investment through Internal and External Financing: Evidence on Cautionary Channel from Japanese Manufacturing Firms

Using firm-level data on the Japanese manufacturing industry, this paper studies the causal impact of uncertainty on the dynamic relation between corporate investment and financing conditions. It demonstrates that the cautionary effect that makes actual corporate investment decisions indifferent to the firm's financing conditions increases in higher uncertainty irrespective of the type of corporate investment---capital investment and R\&D---and is more pronounced in firms with less cash holdings. This result remains even in the weak and invalid instrument robust inference.