The Effect of Real Exchange Rate Volatility on Strategic Investment in Iran

Authors

Department of Economics Shahid Bahonar University, Kerman

Abstract

This study examines the impacts of real exchange rate fluctuations on the companies' strategic investments in Iran. The data of 92 listed companies in Tehran Stock Exchange during the period of 2002-2015areused. First, the volatility of exchange rate is estimated by the Generalized Autoregressive Conditional Heteroskedasticity (GARCH). The model is estimated by GMM and system GMM methods. The results show that the relationship between exchange rate volatility and companies' strategic investments has an inverse U-shaped. The estimation result of GMM method shows that the inflection points for volatility of exchange rate and its lag are 0.08% and 0.13% respectively. When we estimate the model with system GMM the inflection point for exchange rate volatility and its lag are 0.05% and 0.11%, respectively. Moreover, we find out that the first lag of investment and cash flow variables have had positive and significant effects on strategic investment.

Keywords


References

 Abel, A. B., & Eberly, J. C. (1994). A Unified Model of Investment Under Uncertainty. American Economic Review, 84(1), 1369-1384. doi: 10.3386/w4296

Ahmad, I., & Qayyum, A. (2009). Role of Public Expenditures and Macroeconomic Uncertainty in Determining Private Investment in Large Scale Manufacturing Sector of Pakistan. International Research Journal of Finance and Economics, 26, 34-40.

Arellano, M., & Bond, S. (1991 (. Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. Review of Economic Studies, 58(2), 277-297. doi: 10.2307/2297968.

Arellano, M., & Bover, O. (1995). Another Look at the Instrumental Variable Estimation of Error Component Models. Journal of Econometrics, 68 (1), 29-51. doi.org/10.1016/0304-4076 (94)01642-D.

Atella, V.,  Atzeni, G.  & Belvisi, P. (2003). Investment and Exchange Rate Uncertainty. Journal of Policy Modeling, 25(8), 811-824. doi.org/10.1016/S0161-8938(03)00074-7.

Baltaghi, H. B. (2005). Econometric Analysis of Panel Data. 3nd Edition, New York: John Wily & Sons Ltd.

Bleaney, M., & Greenaway, D. (2001).  The impact of terms of trade and real exchange rate volatility on investment and growth in sub-Saharan Africa. Journal of Development Economics, 65, 491-500. doi:10.1016/S0304-3878(01)00147-X.

Blundell, R. W., & Bond, S. R. (1998). Initial Conditions and Moment Restrictions in Dynamic Panel Data Models. Journal of Econometrics, 87, 115-143.  doi.org/ 10.1016/S0304-4076(98)00009-8.

Bulan, L. T. (2005). Real Options, Irreversible Investment and Firm Uncertainty, New Evidence From U.S. Firms. Review of Financial Economics, 14, 255–279. doi:10.1016/j.rfe.2004.09.002.

Dhakal, D., Nag, R., Pradhan, G., & Upadhyaya, K. P. (2010). Exchange Rate Volatility and Foreign Direct Investment: Evidence from East Asian Countries. International Business & Economics Research Journal, 9(7), 121-128.

Drine, I., & Rault, C. (2004). The sources of Real Exchange Fluctuations in Developing Countries: an Econometric Investigation. The University of Michigan Business, William Davidson Institute Working Paper Number 653

Erdal, B. (2001). Investment Decisions under Real Exchange Rate Uncertainty. Central Bank Review, 1, 25-47.

Fazzari, S., Hubbard, R. G., & Peterson, B. C. (1988). Financing Constraints and Corporate Investment. Brookings Papers on Economic Activity, 19(1), 141-195. doi:10.2307/2534426.

Hallet, A. H., Peersman, G., & Piscitelli, L. (2004). Investment under Monetary Uncertainty: A Panel Data Investigation.  Empirica, 31, 137-162. doi:10.1007/s10663-004-1164-2.

 Hartman, R. (1972). The Effects of Price and Cost Uncertainty on Investment. Journal of Economic Theory, 5(2), 258-266. doi:10.1016/0022-0531(72)90105-6.

Hayashi, F. (1982). Tobin's Average q and Marginal q: a Neoclassical Interpretation. Econometrica, 50(1), 213-224. doi:10.2307/1912538.

Henriques, I., & Sadorsky, P. (2011). The Effect of Oil Price Volatility on Strategic Investment. Energy Economics, 33, 79-87. doi:10.1016/j.eneco 2010.09.001.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305-360. doi:10.1016/0304-405X(76)90026-X.

Koetse, M. J., van der Vlist, A. J., & de Groot, H. L. F. (2006). The Impact of Perceived Expectations and Uncertainty on Firm Investment. Small Business Economics, 26(4), 365-376.

Lee, J., & Shin, K. (2000). The Role of a Variable Input in the Relationship between Investment and Uncertainty. International Monetary Fund (IMF), 90(3), 667-680. doi: 10.1257/aer.90.3.667.

Lubinga, M. H., & Kiiza, B. (2013). Exchange Rate Uncertainty and Bilateral Trade Flows: Insights from Uganda. Business and Economic Research, 3(1), 227-239. doi: http://dx.doi.org/10.5296/ber.v3i1.3188.

Mohn, K., & Misund, B. (2009). Investment and Uncertainty in the International Oil and Gas Industry. Energy Economics, 31(2), 240-248. doi:10.1016 /j. eneco.2008.10.001.

Myers, S. C., & Majluf, N. S. (1984). Corporate Financing and Investment Decisions When Firms Have Information Those Investors Do Not Have. Journal of Financial Economics, 13, 187-221. doi.org/10.1016/0304-405 X(84)90023-0.

Nucci, F., & Pozzolo, A. F. (2001). Investment and the Exchange Rate: An Analysis with Firm-Level Panel Data. European Economic Review, 45, 259-283. doi.org/10.1016/S0014-2921(00)00050-7.

Safdari, M., & Soleymani, M. (2011). Exchange Rate Uncertainty and Investment In Some of Middle East and North African Countries. Global Economy and Finance Journal, 4(2), 60-73.

Sarkar, S. (2000). On the Investment Uncertainty Relationship in a Real Options Model. Journal of Economic Dynamics & Control, 24, 219-225. doi.org/10.1016/S0165-1889 (99)00005-6.

Stulz, R. (1990). Managerial Discretion and Optimal Financing Polices. Journal of Financial Economics, 26(1), 3-27. doi:10.1016/0304-405 X(90)90011-N.

Zardashty, G. (2014). The Impact of Real Exchange Rate Uncertainty on Private Investment in Iran. Kuwait Chapter of Arabian Journal of Business and Management Review, 3(10), 1-12.