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Uncertainty and Company Investment Dynamics: Empirical Evidence for UK Firms

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

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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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
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Handle: RePEc:cpr:ceprdp:4025
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