Firms’ sales expectations and marginal propensity to invest

Andrea Alati (), Johannes J Fischer (), Maren Froemel () and Ozgen Ozturk ()
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Andrea Alati: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Johannes J Fischer: Deutsche Bundesbank
Maren Froemel: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Ozgen Ozturk: University of Oxford

No 1087, Bank of England working papers from Bank of England

Abstract: How do firms adjust their investment in response to sales shocks and what determines the response? Using a unique firm‑level survey, we propose a novel approach to estimate UK firms’ marginal propensity to invest (MPI) out of additional income: the forecast error of their sales growth expectations. Investment responds significantly to these sales surprises, with a 1 percentage point unexpected growth in sales translating into a 0.31 percentage point increase in capital expenditure. Firms that are more attentive to the state of the economy are more responsive, consistent with sales growth surprises providing firms with information about their demand. Sales growth surprises also cause firms to increase their prices, supporting this interpretation. We do not find evidence that these results are driven by financial frictions, uncertainty, or productivity shocks.

Keywords: Investment; survey data; corporate finance; financial frictions; learning (search for similar items in EconPapers)
JEL-codes: D22 D25 D84 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2024-08-06
New Economics Papers: this item is included in nep-cfn
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