Can real options explain the impact of uncertainty on Chinese corporate investment?

The real options theory suggests that rms with high uncertainty would not invest unless investment opportu-nities are high. However, using the industrial census of manufacturing rms in China over the period 1998-2013, we nd that rms do not invest aggressively even if investment opportunities are high. To investigate why Chinese rms do not sensitively respond to high investment opportunities, we develop a dynamic model including a sentiment channel. When managers are less condent about their business prospects, managers make invest-ment decisions with worst-case beliefs which prevent investment from responding sensitively to high investment opportunities especially when uncertainty is high. The empirical results conrm our theoretical predictions. Moreover, the impact of uncertainty is more pronounced during the 2008 Global Financial Crisis, reecting further the role of sentiment to uncertainty in rm investment decisions. Our results are robust to using different measures of uncertainty and estimation methods.