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

Ciaran Driver, Paul Temple and Giovanni Urga

No 405, School of Economics Discussion Papers from School of Economics, University of Surrey

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.

Keywords: Investment; Industry; Irreversibility; Real Options; Uncertainty (search for similar items in EconPapers)
JEL-codes: C23 E22 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2005-02
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0405

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