Unbrexity?

This study assesses whether increased uncertainty caused investments to decrease during the United-Kingdom’s post-referendum period. It offers two unique features. First, although the relation between uncertainty and investments has been well studied, none has tested this relationship by comparing two opposing industries in terms of openness to international trade. Second, the period in aftermath of the referendum-announcement of a potential Brexit, ranging from 27th of May 2015 until 23rd of June 2016, caused record-high uncertainty for any actor across the U.K.’s economy, thereby enabling this study to not only implement a frequently used proxy for such uncertainty measure, but to implement and test the validity of this proxy with a variable that truly signals uncertainty. By using quarterly panel data from 333 firms operating in the United Kingdom, this study shows that uncertainty is significantly and negatively related to investments during the post-referendum period, whereas no significant relationship was found for the overall sampling period. Specifically, this relationship is found to be significant for the manufacturing industry only. Hence, these findings only partly support the option-value approach of investments, which argues that firms have an option to either invest gradually or to completely postpone investments, thereby creating the possibility to retrieve information on future developments. However, this study illustrates that industries differ significantly in dealing with this option. Further, this study shows that, first, the proxy for uncertainty estimates a steeper coefficient compared to the alternative estimation for the postannouncement period, and second, that this proxy does not seem to capture the relationship between uncertainty and investment at the overall sampling period. Hence, it is discussed that the validity and practicality of such a proxy is limited.