Firm-level investment spikes and aggregate investment over the Great Recession

Richard Disney (), Helen Miller () and Thomas Pope ()
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Richard Disney: Institute for Fiscal Studies and University of Sussex
Helen Miller: Institute for Fiscal Studies and Institute for Fiscal Studies
Thomas Pope: Institute for Fiscal Studies and Institute for Fiscal Studies

No W18/03, IFS Working Papers from Institute for Fiscal Studies

Abstract: Firm-level investment paths are commonly characterised by periods of low or zero investment punctuated by large investment ‘spikes’. We document that such spikes are important for understanding ?rm and aggregate level investment in the UK. We show that annual variation in aggregate investment is driven by variation in the number of ?rms undertaking investment spikes rather than in the size of spikes or in investment outside of spikes. Our main contribution is to set out and estimate a ?rm-level model of the timing of investment spikes that: (i) incorporates measures of macroeconomic conditions and can be used to replicate movements in aggregate investment; (ii) incorporates a role for ?rm capital structure, which we demonstrate explains part of ?rms’ heterogeneous investment responses to the Great Recession. We ?nd an important role for low demand growth in depressing investment in the recession and for ongoing uncertainty in prolonging investment weakness in later years. The minority of ?rms that persistently operate with high debt levels were signi?cantly less likely to undertake an investment spike after the recession, which is consistent with them having been more exposed to ?nancial distress.

Keywords: Business investment; adjustment cost; recession; hazard functions; capital structure (search for similar items in EconPapers)
JEL-codes: C41 D22 E22 E32 G31 G32 L25 (search for similar items in EconPapers)
Date: 2018-02-07
New Economics Papers: this item is included in nep-cfn, nep-eur and nep-mac
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Citations: View citations in EconPapers (1)

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