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ABSTRACT: This article considers the role of hurdle rates in the analysis of investment decisions, analysing a sample of business units from the PIMS (Profit Impact of Marketing Strategy) databank of North American companies, which provides rarely observed data on hurdle rates. Although the standard literature suggests that firms should only invest if the return exceeds the cost of capital, there are several theories that explain the use of investment hurdle rates that differ from discount rates. In fact, our data show that instances where hurdle rates are either above or below the discount rate are common. In a statistical analysis, we find that this behaviour can be explained by a combination of agency theory and real options theory. We take this as important evidence that a full explanation of capital investment cannot be accomplished without a consideration of behavioural and strategic influences on the investment decision. Copyright The Author 2009. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.
Cambridge Journal of Economics 01/2010; 34(3):501-523. · 1.45 Impact Factor
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ABSTRACT: This paper considers the sources of technological change and productivity growth in the small firm sector of UK manufacturing over the period 1973- 2002, focusing on the mechanisms by which spillovers occur between the large firms which perform the bulk of R&D and smaller firms which are the recipients. It is argued that the current volume of domestic R&D generates profitable and high productivity opportunities for smaller firms. However this mechanism ignores the ways in which R&D also contributes to the more general knowledge base available to small firms as codified information which frequently takes the measurable form of industrial standards. A simple model of labour demand among small manufacturing is developed which employs two measures of technological activity intended to capture both these channels. A co-integrating relationship based upon an augmented labour demand equation is established for UK manufacturing, showing the relevance of both channels for the explanation of productivity growth in the small firm sector.
09/2008;
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ABSTRACT: In this paper we develop models of intra-industry trade in which the technological infrastructure associated with measurement activity plays a role in determining the ability of firms to differentiate their products, making them more marketable, and hence promoting intra-industry trade. We observe that public support for the measurement infrastructure is an important element of public support for industry, while publicly available technical standards provide a significant means by which firms make use of this infrastructure. As an empirical test for the importance of the measurement infrastructure, we consider bi-lateral intra-industry trade flows between economies in the EU and find that both a measure of the cross industry importance of the measurement infrastructure – as proxied by standards - as well as the degree of investment in the ability to measure – as proxied by the use of instruments – are important correlates of intraindustry trade. The econometric analysis suggests that differences in national measurement infrastructures continue to play an important role in determining EU trade flows.
09/2006;
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Journal of Business and Economic Statistics 02/2006; 24(October):432-443. · 1.78 Impact Factor
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ABSTRACT: This paper tests the power of real options theory to explain investment under uncertainty, exploiting differences in the degree of irreversibility between machinery and buildings. It reports estimates of investment equations for each asset class using a large sample of UK manufacturing industries, with results that are consistent with the predictions of real options theory. Additionally, using a specially constructed industryspecific measure of irreversibility for machinery investment, the paper provides further confirmation of the empirical relevance of real options.
06/2005;
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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.
03/2005;
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ABSTRACT: Standard models fail to explain variation in UK capital investment. This paper develops and tests a new theory based on the insights of Edmond Malinvaud, in which investment under uncertainty is adjusted to balance the cost of excess and deficient capacity. Using quarterly UK manufacturing data on two capital assets (machinery and building) over a 30-year period, we obtain unique cointegrating relationships for the model, linking investment, profitability and capacity utilization. Non-nested testing shows that the estimated model performs similarly to a frequently used survey of investment intentions. Our model also addresses differences in the behaviour of the two asset classes; we show that building investment fell relative to machinery investment over the period, reflecting not only relative prices and profitability, but also long term influences such as technology or governance. At the macro level we find little role for any effects from taxation or financial constraints. Copyright 2005, Oxford University Press.
Oxford Economic Papers 02/2005; 57(1):120-141. · 1.11 Impact Factor
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ABSTRACT: In this paper we consider the relationship between the standards created by national standards bodies and long run economic growth, exploring the relationship in the context of the UK and the British Standards Institution (BSI). We suggest that standards provide a key enabling mechanism for the widespread diffusion of major technologies, while being generally supportive of incremental innovation and general technological understanding. In order to further understanding of this mechanism we measure the ‘output’ of the BSI by estimating the size of the BSI ‘catalogue’ available to the economy since its inception in 1901. The measure allows us to estimate an augmented production function for the UK economy over the period 1948-2002. Within a co-integrating framework, we find a statistically significant and unique co-integrating vector between labour productivity, the capital-labour ratio, exogenous technological progress and the BSI catalogue. The long-run elasticity of labour productivity with respect to the standards stock is estimated to be about 0.05, so that the rapid growth of the catalogue in the postwar period is associated with about 13% of the aggregate growth in labour productivity.
11/2004;
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ABSTRACT: This paper compares pooled and non-pooled models of UK capital investment using the Confederation of British Industry’s (CBI) Industrial Trends Survey, focusing on the impact of uncertainty. The uncertainty measure is based on the cross sectional dispersion of optimism about the future business conditions in the industry in which the firm operates. The panel data estimation shows that uncertainty has quantitatively important negative effects on investment. However, if we look at the estimation results at the industry level, we find a great diversity in both estimated elasticities and t-statistics, providing valuable information not available from the pooled model. Finally, we compare the forecast performances of the above models; this analysis confirms that pooled estimators are generally better than non-pooled estimators in terms of out-of-sample forecast performance, but the difference between the two is not very large. Copyright Springer-Verlag 2004
Empirical Economics 02/2004; 29(1):115-128. · 0.60 Impact Factor
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ABSTRACT: Economic theory suggests several plausible reasons why firms may employ hurdle rates for capital investment appraisal that differ from discount rates. Using a sample of business units from the PIMS data bank of North American companies we find that hurdle rates are frequently below and also frequently above matched data on discount rates. Using multinomial logit analysis we find that variables representing the opportunity for strategic investment or the motivation for such investment increase the probability of managerial or strategic behaviour. We also find evidence for an irreversibility effect.
02/2004;
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ABSTRACT: This paper uses direct evidence from reported hurdle rates and discount rates to assess theories of corporate investment appraisal. We find first that hurdle rates are frequently below discount rates, suggesting strategic or managerial behaviour. To test this we use probit analysis to discriminate between this group and an alternative group, where hurdle rates are higher than discount rates. We find that variables representing the opportunity for managerial or strategic investment (e.g. free cash flow) or the motivation (e.g. low growth) increase the probability of firms having hurdle rates below discount rates. In a second stage of the analysis we analyse the relationship between hurdle rates and discount rates for both sets of firms separately. For example, we find that for the strategist firms, product R&D tends to be associated with a lower hurdle rate relative to the discount rate, while for the profit maximising group of firms, the opposite is the case. For the second sample, we also find that risk variables raise the hurdle and that there is some evidence for an irreversibility effect. Responses of the hurdle rate to entry also differ between the two groups.
Royal Economic Society, Royal Economic Society Annual Conference 2003. 01/2003;
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ABSTRACT: This paper uses a model of capital investment that ascribes a theoretical role to profitability and uncertainty in determining the capital-output ratio. Empirical implementation uses quarterly data from UK manufacturing over a thirty-year period, and unique co-integrating relationships are obtained for two asset classes: buildings and plant and machinery. The corresponding dynamic equations are also well specified. Non-nested testing shows that the performance of the estimated investment models ranks similarly to the performance of predictions from direct investment intentions.
09/2002;
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ABSTRACT: This paper reports estimation of investment equations for two classes of fixed assets: plant & machinery and building for a large sample of UK manufacturing industries. It exploits the different degree of irreversibility that characterises these assets to test the power of real options theory to explain investment under uncertainty. Additionally, the paper uses a specially constructed industry-specific measure of irreversibility for plant and machinery investment to test for real options effects within that class of investment.
04/2002;
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ABSTRACT: This paper compares pooled models of capital investment with non-pooled models using the UK's Confederation of British Industry's (CBI) Industrial Trends Survey for the U.K., particularly focusing on the effect of uncertainty on investment. The uncertainty measure is based on the cross sectional dispersion of expectations. The panel data estimation shows that uncertainty has negative effects, which are non negligible in terms of magnitude, on investment. However, if we look at the estimation results at the industry level, we find a great diversity in elasticity and t-statistics, providing valuable information not available from the pooled model. Finally, we compare forecast performances based on the above models. It is confirmed that pooled estimators are generally better than non-pooled estimators in terms of forecast performance, but the difference between the two is not very large.
04/2002;
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ABSTRACT: While the theory examining the relationship between uncertainty and investment has suggested new research avenues, it has not had strong predictive power. Nevertheless, at the policy level the benefits for investment of a more stable economic climate are being emphasised. These considerations point to the need for empirical work. Accordingly, this paper draws on industry level panel data, obtained by marrying the UK Census of Production with the CBI Industrial Trends Survey, and applies dynamic panel data methods to distinguish between macro and micro sources of uncertainty and to consider the role of financial factors. It is found that both sources of uncertainty exert a considerable negative impact on investment, while financial factors may be important in some industries. Copyright 2001 by Scottish Economic Society.
Scottish Journal of Political Economy 02/2001; 48(4):361-82. · 0.21 Impact Factor
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ABSTRACT: This paper presents an empirical analysis of the behavior of U.K. imports of manufactures, intended to develop understanding of nonprice competitiveness by evaluating the impact of capacity constraints, international specialization, and industrial standards. Two data sets are employed: aggregate data for the period 1970-93 and a panel of eighty-one industries for 1985-90. Structural stability in a model of the former suggests that no competitiveness improvement has occurred in domestic U.K. manufacturing which matches that found elsewhere for exports. The panel model shows the important impact of standards on imports, while confirming that skilled labor shortages are a key source of volatility. Copyright 1997 by Royal Economic Society.
Oxford Economic Papers 02/1997; 49(2):207-27. · 1.11 Impact Factor
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ABSTRACT: The paper aims to illumine the longrun impact of specialisation in tourism. It is shown that specialisation in tourism may not be deleterious for economic welfare once the terms of trade are considered. Conditions for an improvement in welfare are laid out and their existence tested by econometric methods within an almost ideal demand system formulation of tourist expenditure for 13 OECD economies. The analysis uses cointegration techniques and novel sequential break dating procedures evaluated where the time dimension is small. The values of the estimated parameters suggest that long run growth may not be harmed by tourism specialisation.
Tourism Management.
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ABSTRACT: We estimate a translog cost function for UK manufacturing storing the time dummy coefficients to estimate external effects. Such effects are found to stem not only from aggregate activity but also from activity in mechanical engineering and from equipment investment.
Economics Letters.
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ABSTRACT: This paper derives a model of capital investment that ascribes a theoretical role to profitability and uncertainty in determining the capital-output ratio. Using quarterly data from UK manufacturing over a thirty-year period, unique cointegrating relationships are obtained for two asset classes: buildings and plant and machinery. The corresponding dynamic equations are also well specified. Non-nested testing shows that the performance of the estimated investment models ranks similarly to the performance of predictions from direct investment intentions.
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ABSTRACT: This paper compares pooled models of capital investment with non-pooled models using the CBI Industrial Trends Survey, particularly focusing on the effect of uncertainty on investment authorisation at the industry level. Two kinds of uncertainty measures are used. One is based on the cross sectional dispersion of expectations, while the other is constructed from time series volatility of profitability. The panel data estimation shows that uncertainty has negative effects, which are non-negligible in terms of magnitude, on investment authorisation. However, if we look at the estimation results at the industry level, we find a great diversity in elasticity and t- statistics, providing valuable information not available from the pooled model. We also present results from an unrestricted SUR model. Finally, we compare forecast performances based on the above models, drawing upon Baltagi and Griffin (1997) and Baltagi, Griffin, and Xiong (2000). It is confirmed that pooled estimators are generally better than non-pooled estimators in terms of forecast performance, but the difference between two is not very large. This implies that, whereas there is some merit in pooling the data, the OLS or SUR methods at industry level perform relatively well.
