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Explaining the Diversity of Industry Investment Responses to Uncertainty Using Long Run Panel Survey Data

Author

Listed:
  • Ciaran Driver

    (Tanaka Business School, Imperial College, London)

  • Paul Temple

    (University of Surrey)

  • Giovanni Urga

    (Cass Business School, London)

Abstract

This paper presents an empirical study of the channels of influence from uncertainty to fixed investment suggested by real options theory. Using panel data from the Confederation of British Industry (CBI) Industrial Trends Survey, we report OLS estimates of the impact of uncertainty on investment where the regressors are augmented by cross-sectional averages of the dependent variable and of the individual specific regressors, as recently suggested by Pesaran (2004). The cross-industry pattern of results is checked for consistency with the pattern predicted by real options theory, using a specially constructed data set of industrial characteristics. We find that irreversibility is able to predict the pattern detected, but only when combined with a measure of the information advantage of delay. There is also evidence for expansion options effects; industries with high R&D and advertising intensities tend to have positive uncertainty effects.

Suggested Citation

  • Ciaran Driver & Paul Temple & Giovanni Urga, 2005. "Explaining the Diversity of Industry Investment Responses to Uncertainty Using Long Run Panel Survey Data," School of Economics Discussion Papers 0405, School of Economics, University of Surrey.
  • Handle: RePEc:sur:surrec:0405
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    File URL: https://repec.som.surrey.ac.uk/2005/DP04-05.pdf
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    References listed on IDEAS

    as
    1. Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1996. "Options, the Value of Capital, and Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 753-777.
    2. Abel, Andrew B & Eberly, Janice C, 1994. "A Unified Model of Investment under Uncertainty," American Economic Review, American Economic Association, vol. 84(5), pages 1369-1384, December.
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    4. Caballero, Ricardo J, 1991. "On the Sign of the Investment-Uncertainty Relationship," American Economic Review, American Economic Association, vol. 81(1), pages 279-288, March.
    5. Ciaran Driver & Katsushi Imai & Paul Temple & Giovanni Urga, 2004. "The effect of uncertainty on UK investment authorisation: Homogenous vs. heterogeneous estimators," Empirical Economics, Springer, vol. 29(1), pages 115-128, January.
    6. Owen A. Lamont, 2000. "Investment Plans and Stock Returns," Journal of Finance, American Finance Association, vol. 55(6), pages 2719-2745, December.
    7. Ciaran Driver & Katsushi Imai & Paul Temple & Giovanni Urga, 2002. "The Effect of Uncertainty on UK Investment Authorisation: Pooled Estimators vs. Heterogeneous Estimators1," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B3-4, International Conferences on Panel Data.
    8. Luigi Guiso & Giuseppe Parigi, 1999. "Investment and Demand Uncertainty," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 185-227.
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    Cited by:

    1. Vivek Ghosal, 2003. "Endemic Volatility of Firms and Establishments: Are Real Options Effects Important?," CIG Working Papers SP II 2003-13, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    2. Ulf von Kalckreuth, 2003. "Exploring the role of uncertainty for corporate investment decisions in Germany," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(II), pages 173-206, June.

    More about this item

    Keywords

    Investment; Industry; Irreversibility; Real Options; Uncertainty;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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