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Prediction ability and investment under uncertainty

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  • Katsuya Takii

Abstract

This paper provides a theoretical framework for analyzing one of the most important intangible assets in a firm: the ability to predict profitable investment opportunities. This paper shows theoretically how to measure the accuracy of information used to predict opportunities, and estimates the value of information in the context of a firm's investment decision problem. Empirical study confirms the theoretical results of the model: (1) prediction ability has a large positive impact on firm's expected profits; and (2) prediction ability increases the mean and the variance of the growth rate of a firm's capital stock.

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Bibliographic Info

Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 518.

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Date of creation: 2000
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Handle: RePEc:esx:essedp:518

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References

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  1. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
  2. O'Brien, James M, 1981. "Estimating the Information Value of Immediate Disclosure of the FOMC Policy Directive," Journal of Finance, American Finance Association, vol. 36(5), pages 1047-61, December.
  3. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  4. Katsuya Takii, 2000. "Prediction Ability," Econometric Society World Congress 2000 Contributed Papers 1411, Econometric Society.
  5. Nicola Persico, 2000. "Information Acquisition in Auctions," Econometrica, Econometric Society, vol. 68(1), pages 135-148, January.
  6. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, 02.
  7. Michael A. Salinger & Lawrence H. Summers, 1984. "Tax Reform and Corporate Investment: A Microeconometric Simulation Study," NBER Working Papers 0757, National Bureau of Economic Research, Inc.
  8. Antonovitz, Frances & Roe, Terry, 1986. "A Theoretical and Empirical Approach to the Value of Information in Risky Markets," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 105-14, February.
  9. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1994. "A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 1-74.
  10. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  11. Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 1999. "Investment behavior, observable expectations, and internal funds," Finance and Economics Discussion Series 1999-27, Board of Governors of the Federal Reserve System (U.S.).
  12. Katsuya Takii, 2000. "Prediction ability and investment under uncertainty," Economics Discussion Papers 518, University of Essex, Department of Economics.
  13. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  14. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  15. Susan Athey & Jonathan Levin, 1998. "The Value of Information In Monotone Decision Problems," Working papers 98-24, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Ueda, Kazuo & Yoshikawa, Hiroshi, 1986. "Financial Volatility and the q Theory of Investment," Economica, London School of Economics and Political Science, vol. 53(29), pages 11-27, February.
  17. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
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Citations

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Cited by:
  1. Bart Hobijn & Boyan Jovanovic, 2000. "The Information Technology Revolution and the Stock Market: Evidence," NBER Working Papers 7684, National Bureau of Economic Research, Inc.
  2. Katsuya Takii, 2003. "Prediction Ability," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 80-98, January.
  3. Katsuya Takii, 2000. "Prediction ability and investment under uncertainty," Economics Discussion Papers 518, University of Essex, Department of Economics.
  4. Katsuya Takii, 2004. "Entrepreneurial Efficiency: An Empirical Framework and Evidence," Macroeconomics 0411006, EconWPA.

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