Uncertainty and Company Investment Dynamics: Empirical Evidence for UK Firms
Nicholas Bloom (),
Stephen Roy Bond and
John van Reenen ()
No 4025, CEPR Discussion Papers from C.E.P.R. Discussion Papers
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.
Keywords: investment; panel data; real options; uncertainty (search for similar items in EconPapers)
JEL-codes: C23 D80 D92 E22 (search for similar items in EconPapers)
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