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Uncertainty, Capital Investment, and Risk Management

We examine the simultaneous effects of uncertainty on firm-level capital investment and risk management, using forward-looking and exogenous measures of output price uncertainty. The effect of uncertainty on capital investment varies with firms' hedging strategy, and firm size plays a pivotal role in these effects. When faced with high price uncertainty, large firms increase their hedging intensity but do not lower capital investment or net debt issuance, whereas small firms do not adjust their hedging intensity but significantly lower capital expenditure and net debt issuance. Our analysis highlights the importance of considering risk management while examining the uncertainty-investment relationship.