Abstract
Small and medium enterprises (SMEs) play a critical role in economic growth, yet they face persistent financial constraints that hinder their ability to invest in tangible assets. While existing research explores the impact of long-term uncertainties on SME investment behavior, this study addresses these gaps by investigating how short-term uncertainty influences tangible assets and whether this effect aggravated with the external financing constraints drawing on real options and pecking order theory. Using a panel dataset of UK SMEs from 2007 to 2021 and system-GMM estimation, findings reveal that higher cashflow uncertainty significantly restricts investment in tangible assets, supporting real options theory. Additionally, financing constraints intensify the effect of uncertainty on investment, reinforcing the pecking order theory prediction that financially constrained SMEs prioritize liquidity over long-term asset accumulation. The research findings provide useful insight for policymakers to target financial support mechanisms—such as government-backed credit programs, tax incentives, or flexible lending policies—to help SMEs manage short-term uncertainty and sustain investment levels.