Working Paper: CEPR ID: DP4025
Authors: Nicholas Bloom; Stephen R. Bond; John Van Reenen
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; panel data; real options; uncertainty
JEL Codes: C23; D80; D92; E22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Uncertainty (D89) | Investment Dynamics (G11) |
| Sales Growth (O49) | Investment Dynamics (G11) |