2013 China International Conference in Finance July 10-13, 2013 Shanghai, China Growth Uncertainty and the Persistence of Investment and Financial Policies

Using a firm’s monthly market-to-book ratio volatility (MBVol) to measure uncertainty about its growth prospects each year, this paper demonstrates that annual MBVol persists and initial growth uncertainty predicts persistent investment and financial policies over 20 years. More precisely, high and low MBVol firms, sorted early on, have persistently high and low market-to-book ratios and investment styles (measured by R&D/[R&D+Capex]), and persistently low and high leverage ratios and propensities to pay dividends, respectively. Year by year, initial MBVol negatively affects propensity to issue debt but positively affects propensity to issue equity, strengthening an initial-MBVol-aligned pattern in pecking orders in external financing where growth uncertainty tends to facilitate new equity financing. All this suggests that firms invest and seek financing in a manner compatible with their persistent growth uncertainty. Initial MBVol as a linchpin connecting important corporate financial decisions helps put seemingly isolated financial policies under the same spotlight.