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Firm-level investment spikes and aggregate investment over the Great Recession

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  • Richard Disney

    (Institute for Fiscal Studies and University of Sussex)

  • Helen Miller

    (Institute for Fiscal Studies and Institute for Fiscal Studies)

  • Thomas Pope

    (Institute for Fiscal Studies and Institute for Fiscal Studies)

Abstract

Firm-level investment paths are commonly characterised by periods of low or zero investment punctuated by large investment ‘spikes’. We document that such spikes are important for understanding ?rm and aggregate level investment in the UK. We show that annual variation in aggregate investment is driven by variation in the number of ?rms undertaking investment spikes rather than in the size of spikes or in investment outside of spikes. Our main contribution is to set out and estimate a ?rm-level model of the timing of investment spikes that: (i) incorporates measures of macroeconomic conditions and can be used to replicate movements in aggregate investment; (ii) incorporates a role for ?rm capital structure, which we demonstrate explains part of ?rms’ heterogeneous investment responses to the Great Recession. We ?nd an important role for low demand growth in depressing investment in the recession and for ongoing uncertainty in prolonging investment weakness in later years. The minority of ?rms that persistently operate with high debt levels were signi?cantly less likely to undertake an investment spike after the recession, which is consistent with them having been more exposed to ?nancial distress.

Suggested Citation

  • Richard Disney & Helen Miller & Thomas Pope, 2018. "Firm-level investment spikes and aggregate investment over the Great Recession," IFS Working Papers W18/03, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:18/03
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    1. Pravakar Sahoo & Ashwani Bishnoi, 2021. "Drivers of Corporate Investment Slowdown in India: A Firm Level Analysis," IEG Working Papers 441, Institute of Economic Growth.

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    More about this item

    Keywords

    Business investment; adjustment cost; recession; hazard functions; capital structure;
    All these keywords.

    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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