Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/71521 
Year of Publication: 
2001
Series/Report no.: 
IFS Working Papers No. 01/05
Publisher: 
Institute for Fiscal Studies (IFS), London
Abstract: 
We derive robust predictions on the effects of uncertainty on short run investment dynamics in a broad class of models with (partial) irreversibility. When their environment becomes more uncertain firms become more cautious and less responsive to demand shocks. This result contrasts with the long run analysis, in which the effect of real options on the level of the capital stock is ambiguous. An investment model is estimated to test these theoretical predictions using a panel of UK firms and a stock returns-based measure of uncertainty. As predicted we find that uncertainty reduces firms' responsiveness to demand shocks.
Subjects: 
Investment
uncertainty
real options
panel data
JEL: 
D92
E22
D8
C23
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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