WP04/12 The roles of expected profitability, Tobin’s Q and cash flow in econometric models of company investment

This paper tests pair-wise causal relationships between uncertainty, returns and investment using unbalanced panel data of the 13 insurance companies listed in the KSE for the period from 1996 to 2008. Volatility of returns from the daily stock was measured using the GARCH (p, q) for appropriate values of p and q. The study applied panel data models in the lines of common constants, fixed effects and random effects in order explore effects of uncertainty and investment on returns. The results show significant positive effect of uncertainty on the returns from investment. This subsequently recommends that investment under volatile conditions might prove a blessing for the investors of the insurance stocks. These findings are contradictory to the results of some of the previous studies. For most of the stocks, hypothesis of “investment (I) does not Granger cause uncertainty (H) ” or “uncertainty (H) does not Granger cause investment (I) ” could not be rejected. The study finds that change in returns from securities definitely brings about changes in the risk and uncertainty.

Application to Germany 2008-09

This paper investigates the effects of going public on innovation. Using a novel data set consisting of innovative firms that filed for an initial public offering (IPO), I compare the longrun innovation of firms that completed their filing and went public with that of firms that withdrew their filing and remained private. I use NASDAQ fluctuations during the bookbuilding period as a source of exogenous variation that affects IPO completion but is unlikely to affect long-run innovation. Using this instrumental variables approach, I find that going public affects firms’strategies in pursuing innovation. The quality of internal innovation declines by 50 percent relative to firms that remained private, measured by standard patent-based metrics. The decline in innovation is driven by both an exodus of skilled inventors and a decline in productivity among remaining inventors. However, access to public equity markets allows firms to partially offset the decline in internally generated innovation by attracting new human capital and purchasing externally generated innovations through mergers and acquisitions. Managerial incentives seem to play an important role in explaining the results.

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