The Impact of Uncertainty on Investment Behavior: Evidence from European Professional Soccer Clubs

Abstract

This paper examines investment behavior of firms and how uncertainty plays a role in a firm's decision-making process and investment patterns. This study capitalizes on a unique opportunity in which risk is clearly defined, allowing for easily quantifiable measures of uncertainty from which to measure its role in investment. Data on firms' investment and uncertainty comes from professional soccer clubs from the English Premier League and Germany's Bundesliga. Total transfer expenditure by a club and a club's position in the standings are used to measure investment and uncertainty. This study found that increasing levels of uncertainty yields decreasing levels of investment as firms choose to delay investment decisions and acquire more information. Furthermore, it was found that firms also choose to make lumpy investment decisions when uncertainty is low, with investment levels smoothing as uncertainty rises.