Business Investment, Cash Holding and Uncertainty Since the Great Financial Crisis

35 Pages Posted: 29 Aug 2018

See all articles by Pawel Smietanka

Pawel Smietanka

Bank of England

Nicholas Bloom

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Paul Mizen

University of Nottingham; Bank of England; Centre for Economic Policy Research (CEPR)

Date Written: August 24, 2018

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.

Keywords: uncertainty, investment, cash holdings, dividend policy, survey forecasts

JEL Classification: E22, G31, G32, G35

Suggested Citation

Smietanka, Pawel and Bloom, Nicholas and Mizen, Paul, Business Investment, Cash Holding and Uncertainty Since the Great Financial Crisis (August 24, 2018). Bank of England Working Paper No. 753, Available at SSRN: https://ssrn.com/abstract=3240493 or http://dx.doi.org/10.2139/ssrn.3240493

Pawel Smietanka (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
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Nicholas Bloom

Stanford University - Department of Economics ( email )

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Stanford, CA 94305-6072
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HOME PAGE: http://economics.stanford.edu/faculty/bloom

National Bureau of Economic Research (NBER) ( email )

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Paul Mizen

University of Nottingham ( email )

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Nottingham, NG8 1BB
United Kingdom
+44 115 951 5479 (Phone)
+44 115 951 4159 (Fax)

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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