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Uncertainty and Company Investment Dynamics: Empirical Evidence for UK Firms

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  • Bloom, Nicholas
  • Bond, Stephen Roy
  • Van Reenen, John

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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4025.

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Date of creation: Aug 2003
Date of revision:
Handle: RePEc:cpr:ceprdp:4025

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Keywords: investment; panel data; real options; uncertainty;

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Cited by:
  1. Nick Bloom & Raffaella Sadun & John Van Reenen, 2007. "Americans Do I.T. Better: US Multinationals and the Productivity Miracle," CEP Discussion Papers dp0788, Centre for Economic Performance, LSE.
  2. Elena Bontempi & Roberto Golinelli & Giuseppe Parigi, 2007. "Why demand uncertainty curbs investment: Evidence froma a panel of Italian manufacturing firms," Temi di discussione (Economic working papers) 621, Bank of Italy, Economic Research and International Relations Area.
  3. Bianco, Madga & Golinelli, Roberto & Parigi, Giuseppe, 2009. "Family firms and investments," MPRA Paper 19247, University Library of Munich, Germany.
  4. Nick Bloom & Stephen Bond & John Van Reenen, 2006. "Uncertainty and Investment Dynamics," CEP Discussion Papers dp0739, Centre for Economic Performance, LSE.
  5. Letterie, Wilko A. & Pfann, Gerard A., 2007. "Structural identification of high and low investment regimes," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 797-819, April.
  6. Jan Hendrik, Fisch, 2011. "Real call options to enlarge foreign subsidiaries - The moderating effect of irreversibility on the influence of economic volatility and political instability on subsequent FDI," Journal of World Business, Elsevier, vol. 46(4), pages 517-526, October.
  7. Fisch, Jan Hendrik, 2008. "Internalization and internationalization under competing real options," Journal of International Management, Elsevier, vol. 14(2), pages 108-123, June.

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