Investment under Uncertainty and Financial Crisis: A Comparision of Adjustment Cost in Foreign and Domestic Firms in Turkey

The objective of the paper is to test the stability hypothesis – that foreign investors are relatively insulated from uncertainty and how it spills over on their investment adjustment cost. The Q model (implying that investments are explained by the fundamental value of the firm) is implemented with reasonable success for firm level panels in Turkey. Robustness of the results and despite the general obstacle that inflation poses on the study is increased by applying different datasets with different time horizons, different measures of investment and profitability and different problems of attrition. The general finding of the study is that the stability hypothesis is confirmed. The difference in adjustment cost across domestic and foreign owned firms is particularly affected by uncertainty measures whereas the general adjustment cost difference is estimated to be small. In periods of high uncertainty it is found that the decline in the growth of the investment rate for domestic firms is at least twice as high compared to the decline in the growth of the investment rate among foreign held firms.