Uncertainty and Company Investment Dynamics: Empirical Evidence for UK Firms

Stephen Roy Bond, John van Reenen and Nicholas Bloom

No 4025, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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; Uncertainty; Real options; Panel data (search for similar items in EconPapers)
JEL-codes: C23 D80 D92 E22 (search for similar items in EconPapers)
Date: 2003-08
New Economics Papers: this item is included in nep-eec
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Citations: View citations in EconPapers (15)

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