Discussion Paper Details

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Title: Uncertainty and Company Investment Dynamics: Empirical Evidence for UK Firms

Author(s): Nicholas Bloom, Stephen Roy Bond and John Van Reenen

Publication Date: August 2003

Keyword(s): investment, panel data, real options and uncertainty

Programme Area(s): Industrial Organization

Abstract: This Paper investigates the empirical relationship between uncertainty and investment dynamics. This is motivated by the real options literature, which suggests a weaker response of investment to demand shocks at higher levels of uncertainty, as firms place a greater value on the option to wait. Using simulated data we show that this more cautious behaviour can be detected as a smaller impact of sales growth on investment for firms facing higher uncertainty. Using a stock returns volatility measure of uncertainty for a large panel of quoted UK companies, we find a similar interaction effect in our econometrics analysis.

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Bibliographic Reference

Bloom, N, Bond, S and Van Reenen, J. 2003. 'Uncertainty and Company Investment Dynamics: Empirical Evidence for UK Firms'. London, Centre for Economic Policy Research.