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.