DP4025 Uncertainty and Company Investment Dynamics: Empirical Evidence for UK Firms
|Author(s):||Nicholas Bloom, Stephen Roy Bond, John Van Reenen|
|Publication Date:||August 2003|
|Keyword(s):||investment, panel data, real options, uncertainty|
|JEL(s):||C23, D80, D92, E22|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=4025|
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.