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Firms’ Sales Expectations and Marginal Propensity to Invest

Author

Listed:
  • Andrea Alati

    (Bank of England)

  • Johannes J. Fischer

    (Bank of England)

  • Maren Froemel

    (Bank of England)

  • Ozgen Ozturk

    (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. We find attentive firms to be 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

  • Andrea Alati & Johannes J. Fischer & Maren Froemel & Ozgen Ozturk, 2024. "Firms’ Sales Expectations and Marginal Propensity to Invest," Discussion Papers 2424, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2424
    as

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    File URL: https://www.lse.ac.uk/CFM/assets/pdf/CFM-Discussion-Papers-2024/CFMDP2024-24-Paper.pdf
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    References listed on IDEAS

    as
    1. George W. Evans, 2001. "Expectations in Macroeconomics. Adaptive versus Eductive Learning," Revue Économique, Programme National Persée, vol. 52(3), pages 573-582.
    2. Priit Jeenas, 2023. "Firm balance sheet liquidity, monetary policy shocks, and investment dynamics," Economics Working Papers 1872, Department of Economics and Business, Universitat Pompeu Fabra.
    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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