Paper Title
The Effect of Uncertainty on Investment Size

This paper re-examines the effect of uncertainty on investment. It differs from the existing studies on this topic by focusing on a scenario that has not been examined yet, that is, when the company can choose the investment size but not the timing. In such a situation, we show that the effect depends crucially on the correlation between the project’s cash flows and the market portfolio – for negative or zero correlation, uncertainty has a positive effect on investment, and for positive correlation it has initially a negative effect and subsequently a positive effect. If the positive correlation is large enough, then the negative effect persists over the entire reasonable range of uncertainty. This points to the fact that the uncertainty-investment relationship is dependent on a number of factors such as the company’s circumstances in making the investment decision (whether it gets to choose investment size or timing or both), the project’s correlation with the market and the current level of uncertainty. It also points to the need for refining empirical testing to account for the above-mentioned factors affecting the relationship. Keywords - Uncertainty; Volatility; Investment size; Real-option model. JEL Classification - D2, G3.