Firms’ Sales Expectations and Marginal Propensity to Invest

Andrea Alati, Johannes J. Fischer (), Maren Froemel () and Ozgen Ozturk ()
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Johannes J. Fischer: Bank of England
Maren Froemel: Bank of England
Ozgen Ozturk: University of Oxford

No 2424, Discussion Papers from Centre for Macroeconomics (CFM)

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. We find attentive firms to be 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: 53 pages
Date: 2024-05
New Economics Papers: this item is included in nep-cfn and nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:2424

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