Uncertainty and Company Investment Dynamics: Empirical Evidence for UK Firms

55 Pages Posted: 10 Oct 2003

See all articles by Nicholas Bloom

Nicholas Bloom

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

Stephen R. Bond

Nuffield College; Institute for Fiscal Studies (IFS)

John Van Reenen

London School of Economics - Centre for Economic Performance (CEP); Stanford Graduate School of Business; Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR)

Date Written: August 2003

Abstract

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.

Keywords: Investment, uncertainty, real options, panel data

JEL Classification: C23, D80, D92, E22

Suggested Citation

Bloom, Nicholas and Bond, Stephen R. and Van Reenen, John Michael, Uncertainty and Company Investment Dynamics: Empirical Evidence for UK Firms (August 2003). CEPR Discussion Paper No. 4025. Available at SSRN: https://ssrn.com/abstract=457621

Nicholas Bloom (Contact Author)

Stanford University - Department of Economics ( email )

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HOME PAGE: http://economics.stanford.edu/faculty/bloom

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Stephen R. Bond

Nuffield College ( email )

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Institute for Fiscal Studies (IFS)

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John Michael Van Reenen

London School of Economics - Centre for Economic Performance (CEP) ( email )

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Stanford Graduate School of Business ( email )

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Institute for Fiscal Studies (IFS) ( email )

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+44 20 7240 6136 (Fax)

Centre for Economic Policy Research (CEPR)

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United Kingdom

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