DISCUSSION PAPER SERIES
No. 4025
UNCERTAINTY AND COMPANY INVESTMENT DYNAMICS: EMPIRICAL EVIDENCE FOR UK FIRMS Nicholas Bloom, Stephen R Bond and John Van Reenen INDUSTRIAL ORGANIZATION
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UNCERTAINTY AND COMPANY INVESTMENT DYNAMICS: EMPIRICAL EVIDENCE FOR UK FIRMS Nicholas Bloom, Centre for Economic Performance, University College London and CEPR Stephen R Bond, Institute for Fiscal Studies and Nuffield College, University of Oxford John Van Reenen, Centre for Economic Performance, University College London and CEPR Discussion Paper No. 4025 August 2003 Centre for Economic Policy Research 90–98 Goswell Rd, London EC1V 7RR, UK Tel: (44 20) 7878 2900, Fax: (44 20) 7878 2999 Email:
[email protected], Website: www.cepr.org This Discussion Paper is issued under the auspices of the Centre’s research programme in INDUSTRIAL ORGANIZATION. Any opinions expressed here are those of the author(s) and not those of the Centre for Economic Policy Research. Research disseminated by CEPR may include views on policy, but the Centre itself takes no institutional policy positions. The Centre for Economic Policy Research was established in 1983 as a private educational charity, to promote independent analysis and public discussion of open economies and the relations among them. It is pluralist and non-partisan, bringing economic research to bear on the analysis of medium- and long-run policy questions. Institutional (core) finance for the Centre has been provided through major grants from the Economic and Social Research Council, under which an ESRC Resource Centre operates within CEPR; the Esmée Fairbairn Charitable Trust; and the Bank of England. These organizations do not give prior review to the Centre’s publications, nor do they necessarily endorse the views expressed therein. These Discussion Papers often represent preliminary or incomplete work, circulated to encourage discussion and comment. Citation and use of such a paper should take account of its provisional character. Copyright: Nicholas Bloom, Stephen R Bond and John Van Reenen
CEPR Discussion Paper No. 4025 August 2003
ABSTRACT Uncertainty and Company Investment Dynamics: Empirical Evidence for UK Firms* 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. JEL Classification: C23, D80, D92 and E22 Keywords: investment, panel data, real options and uncertainty Nicholas Bloom Centre for Economic Performance London School of Economics Houghton Street London WC2A 2AE Tel: (44 20) 7955 7408 Email:
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Stephen R Bond Institute for Fiscal Studies 7 Ridgemount Street London WC1E 7AE Tel: (44 20) 7291 4800 Fax: (44 20) 7323 4780 Email:
[email protected]
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John Van Reenen Centre for Economic Performance London School of Economics Houghton Street London WC2A 2AE Email:
[email protected] For further Discussion Papers by this author see: www.cepr.org/pubs/new-dps/dplist.asp?authorid=118276
*The authors would like to thank Jerome Adda, Manuel Arellano, Orazio Attanasio, Richard Blundell, Russell Cooper, Jason Cummins, Janice Eberly, Domenico Lombardi, Costas Meghir, Steve Nickell, Ian Preston, Isabel Reduto dos Reis, and Frank Windmeijer. This research is part of the program of research at the ESRC Centre for the Micro-Economic Analysis of Public Policy at the IFS. Financial Support of the ESRC is gratefully acknowledged. This Paper is produced as part of a CEPR research network on ‘Product Markets, Financial Markets and the Pace of Innovation in Europe’, funded by the European Commission under the Research Training Network Programme (Contract No: HPRN-CT-2000-00061). Submitted 21 July 2003
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