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Business investment, cash holding and uncertainty since the Great Financial Crisis

Author

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  • Smietanka, Pawel

    () (Bank of England)

  • Bloom, Nicholas

    () (Stanford University)

  • Mizen, Paul

    () (University of Nottingham)

Abstract

The Lehman Brothers event in 2008 created a large uncertainty shock that triggered an economic slowdown lasting a decade. The macroeconomic effects are well documented, but the effect on business decisions much less so. In this paper, we explore corporate data to investigate how economic uncertainty affected investment, dividend payouts and cash holdings, based on over 10,000 UK firm-year observations. We offer new insights into the relationship between business decisions and uncertainty, by exploiting two surveys of macroeconomic uncertainty from professional forecasters and CFOs collected by the Bank of England. These data demonstrate that heightened economic uncertainty lowered investment even after controlling for investment opportunities, sales growth, and the firm’s own stock volatility. Economic uncertainty also explains the rise in cash holdings and the fall in payouts. Hence, our results help explain why UK firms invested so little and held so much cash at a time of historically low interest rates, and also why they paid out smaller dividends. These results may help explain recent sluggish productivity in the UK economy, and they also are important, because they provide a benchmark for future studies of Brexit-related uncertainty.

Suggested Citation

  • Smietanka, Pawel & Bloom, Nicholas & Mizen, Paul, 2018. "Business investment, cash holding and uncertainty since the Great Financial Crisis," Bank of England working papers 753, Bank of England.
  • Handle: RePEc:boe:boeewp:0753
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    References listed on IDEAS

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    Cited by:

    1. Nicholas Bloom & Philip Bunn & Scarlet Chen & Paul Mizen & Pawel Smietanka & Greg Thwaites & Garry Young, 2018. "Brexit and Uncertainty: Insights from the Decision Maker Panel," Fiscal Studies, John Wiley & Sons, vol. 39(4), pages 555-580, December.
    2. Santiago Barraza & Andrea Civelli, 2019. "Economic Policy Uncertainty and the Supply of Business Loans," Working Papers 134, Universidad de San Andres, Departamento de Economia, revised Oct 2019.
    3. Lucyna Gornicka, 2018. "Brexit Referendum and Business Investment in the UK," IMF Working Papers 18/247, International Monetary Fund.

    More about this item

    Keywords

    uncertainty; investment; cash holdings; dividend policy; survey forecasts;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • 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
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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