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Firms’ sales expectations and marginal propensity to invest

Author

Listed:
  • Alati, Andrea

    (Bank of England)

  • Fischer, Johannes J

    (Deutsche Bundesbank)

  • Froemel, Maren

    (Bank of England)

  • Ozturk, Ozgen

    (University of Oxford)

Abstract

How do firms adjust their investment in response to sales shocks and what determines the response? Using a unique firm‑level survey, we propose a novel approach to estimate UK firms’ marginal propensity to invest (MPI) out of additional income: the forecast error of their sales growth expectations. Investment responds significantly to these sales surprises, with a 1 percentage point unexpected growth in sales translating into a 0.31 percentage point increase in capital expenditure. Firms that are more attentive to the state of the economy are more responsive, consistent with sales growth surprises providing firms with information about their demand. Sales growth surprises also cause firms to increase their prices, supporting this interpretation. We do not find evidence that these results are driven by financial frictions, uncertainty, or productivity shocks.

Suggested Citation

  • Alati, Andrea & Fischer, Johannes J & Froemel, Maren & Ozturk, Ozgen, 2024. "Firms’ sales expectations and marginal propensity to invest," Bank of England working papers 1087, Bank of England.
    • Handle: RePEc:boe:boeewp:1087
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    References listed on IDEAS

    as
    1. Aubhik Khan & Julia K. Thomas, 2013. "Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity," Journal of Political Economy, University of Chicago Press, vol. 121(6), pages 1055-1107.
    2. George W. Evans, 2001. "Expectations in Macroeconomics. Adaptive versus Eductive Learning," Revue Économique, Programme National Persée, vol. 52(3), pages 573-582.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Investment; survey data; corporate finance; financial frictions; learning;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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