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Business investment, cash holding and uncertainty since the Great Financial Crisis

Pawel Smietanka (), Nicholas Bloom () and Paul Mizen ()
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Pawel Smietanka: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Nicholas Bloom: Stanford University
Paul Mizen: University of Nottingham

No 753, Bank of England working papers from Bank of England

Abstract: The Lehman Brothers event in 2008 created a large uncertainty shock that triggered an economic slowdown lasting a decade. The macroeconomic effects are well documented, but the effect on business decisions much less so. In this paper, we explore corporate data to investigate how economic uncertainty affected investment, dividend payouts and cash holdings, based on over 10,000 UK firm-year observations. We offer new insights into the relationship between business decisions and uncertainty, by exploiting two surveys of macroeconomic uncertainty from professional forecasters and CFOs collected by the Bank of England. These data demonstrate that heightened economic uncertainty lowered investment even after controlling for investment opportunities, sales growth, and the firm’s own stock volatility. Economic uncertainty also explains the rise in cash holdings and the fall in payouts. Hence, our results help explain why UK firms invested so little and held so much cash at a time of historically low interest rates, and also why they paid out smaller dividends. These results may help explain recent sluggish productivity in the UK economy, and they also are important, because they provide a benchmark for future studies of Brexit-related uncertainty.

Keywords: uncertainty; investment; cash holdings; dividend policy; survey forecasts (search for similar items in EconPapers)
JEL-codes: E22 G31 G32 G35 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-mac and nep-mon
Date: 2018-08-24
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0753

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