TWIN-RATE UNCERTAINTY, DEBT AND INVESTMENT DECISIONS– EVIDENCE FROM DOW JONES PANEL DATA

This article modifies the intertemporal optimization model proposed by Bo and Sterken (2002) by considering firm debt composition to derive a more suitable physical investment function and evaluates how twin-rate(i.e., interest rate and exchange rate) uncertainty, derived from the issuance of domestic and foreign debts, influences firms’ investment decisions. The new model focuses on the effects of financial leverage—the use of debt and its role in the financial structure of a company—on firm decisions under uncertainty. Empirical results reveal that from the viewpoint of market standing, companies in Dow Jones Indexes decrease their investment as uncertainty increases. Moreover, when the foreign interest rates are lower along with lower exchange rate volatility, companies in the Dow Jones Indexes are inclined to increase the issuance of overseas firm debt in order to finance their planned investments.