Discussion paper

DP4025 Uncertainty and Company Investment Dynamics: Empirical Evidence for UK Firms

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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Citation

Bond, S, J Van Reenen and N Bloom (2003), ‘DP4025 Uncertainty and Company Investment Dynamics: Empirical Evidence for UK Firms‘, CEPR Discussion Paper No. 4025. CEPR Press, Paris & London. https://cepr.org/publications/dp4025