Business Optimism for Small, Medium and Large Firms: Does It Explain Investment?*

Authors


  • *

    Submitted May 2006.

  • Thanks to Jonathan Wood of the CBI for providing data and to the ESRC for financial assistance (R000223385). The author would also like to thank J. Munoz Bugarin for data collection and analysis. Helpful comments were received from Toke Reichstein, Paul Temple, two referees and (without implication) officials at HM Treasury.

  • JEL classification numbers: E22, L60.

Abstract

We use UK survey data on variation in business optimism by manufacturing size group to estimate the determinants of optimism using OLS and SURE. There are similarities across the size groups but also some differences: the medium-size group seems to have been unusually affected by real interest rates in recent years. We also model investment authorisations, conditional on business optimism. Again, there are similarities across the size groups. However, the largest-size group, and possibly also the medium-size group, seem to be investing less in recent years in relation to reported optimism. By contrast, capital investment by smaller-sized firms has been stable in relation to business optimism. Some tentative explanations for these findings are explored.

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