Environmental Uncertainty Reduction by Smoothing and Buffering: An Empirical Verification

Abstract

The article presents a study which examined the proposition that firms smooth input and output activities to decrease environmental uncertainty within the framework of portfolio theory, a model employed by economists to study decision making problems under uncertainty. Risk measures for common stocks used in the study are discussed. The association between risk and the extent of smoothing as well as methods of reducing uncertainty by smoothing and buffering are examined.