Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/200292
Authors: 
Disney, Richard
Miller, Helen
Pope, Thomas
Year of Publication: 
2018
Series/Report no.: 
IFS Working Papers W18/03
Abstract: 
Firm-level investment paths are commonly characterised by periods of low or zero investment punctuated by large investment 'spikes'. We document that such spikes are important for understanding firm and aggregate level investment in the UK. We show that annual variation in aggregate investment is driven by variation in the number of firms undertaking investment spikes rather than in the size of spikes or in investment outside of spikes. Our main contribution is to set out and estimate a firm-level model of the timing of investment spikes that: (i) incorporates measures of macroeconomic conditions and can be used to replicate movements in aggregate investment; (ii) incorporates a role for firm capital structure, which we demonstrate explains part of firms' heterogeneous investment responses to the Great Recession. We find an important role for low demand growth in depressing investment in the recession and for ongoing uncertainty in prolonging investment weakness in later years. The minority of firms that persistently operate with high debt levels were significantly less likely to undertake an investment spike after the recession, which is consistent with them having been more exposed to financial distress.
Subjects: 
Business investment
adjustment cost
recession
hazard functions
capital structure
JEL: 
C41
D22
E22
E32
G31
G32
L25
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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