IDEAS home Printed from https://ideas.repec.org/p/qeh/qehwps/qehwps39.html
   My bibliography  Save this paper

Making Bad Decisions: firm size and investment under uncertainty

Author

Listed:
  • Alexander Cobham

Abstract

This paper presents a 'real options' model of investment under uncertainty, which incorporates the assumption of a financial market characterised by asymmetric information and which can explain the stylised facts of firm growth. The decision-making situation faced by small and medium-sized enterprises (SMEs) features much greater constraints on the ability to gather information in order to reduce uncertainty about their investment opportunities, compared with that faced by large companies (LCs). This necessarily causes relatively poor decision-making by SMEs, and explains their substantial death rates.

Suggested Citation

  • Alexander Cobham, "undated". "Making Bad Decisions: firm size and investment under uncertainty," QEH Working Papers qehwps39, Queen Elizabeth House, University of Oxford.
    • Handle: RePEc:qeh:qehwps:qehwps39
    as

    Download full text from publisher

    File URL: http://workingpapers.qeh.ox.ac.uk/RePEc/qeh/qehwps/qehwps39.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. Evans, David S, 1987. "The Relationship between Firm Growth, Size, and Age: Estimates for 100 Manufacturing Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 567-581, June.
    4. Menkveld, A J & Thurik, A R, 1999. "Firm Size and Efficiency in Innovation: Reply," Small Business Economics, Springer, vol. 12(1), pages 97-101, February.
    5. Cabral, Luis, 1995. "Sunk Costs, Firm Size and Firm Growth," Journal of Industrial Economics, Wiley Blackwell, vol. 43(2), pages 161-172, June.
    6. Cho, Yoon Je, 1986. "Inefficiencies from Financial Liberalization in the Absence of Well-Functioning Equity Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(2), pages 191-199, May.
    7. Alan Carruth & Andy Dickerson & Andrew Henley, 2000. "What do We Know About Investment Under Uncertainty?," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 119-154, April.
    8. Sangeeta Pratap & Silvio Rendon, 2003. "Firm Investment in Imperfect Capital Markets: A Structural Estimation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 513-545, July.
    9. Luís M B Cabral & José Mata, 2003. "On the Evolution of the Firm Size Distribution: Facts and Theory," American Economic Review, American Economic Association, vol. 93(4), pages 1075-1090, September.
    10. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    11. Greenwald, Bruce & Stiglitz, Joseph E & Weiss, Andrew, 1984. "Informational Imperfections in the Capital Market and Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 74(2), pages 194-199, May.
    12. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    13. Thomas F. Cooley & Vincenzo Quadrini, 2001. "Financial Markets and Firm Dynamics," American Economic Review, American Economic Association, vol. 91(5), pages 1286-1310, December.
    14. Alexander Cobham, "undated". "The Financing and Technology Decisions of SMEs: II. Technology and Policy," QEH Working Papers qehwps25, Queen Elizabeth House, University of Oxford.
    15. Berger, Allen N. & Saunders, Anthony & Scalise, Joseph M. & Udell, Gregory F., 1998. "The effects of bank mergers and acquisitions on small business lending," Journal of Financial Economics, Elsevier, vol. 50(2), pages 187-229, November.
    16. Alexander Cobham, "undated". "The Financing and Technology Decisions of SMEs: I. Finance as a Determinant of Investment," QEH Working Papers qehwps24, Queen Elizabeth House, University of Oxford.
    17. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    18. Hall, Bronwyn H, 1987. "The Relationship between Firm Size and Firm Growth in the U.S. Manufacturing Sector," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 583-606, June.
    19. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    20. Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, vol. 5(2), pages 258-266, October.
    21. Hellmann, Thomas & Stiglitz, Joseph, 2000. "Credit and equity rationing in markets with adverse selection," European Economic Review, Elsevier, vol. 44(2), pages 281-304, February.
    22. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-233, March.
    23. Kadapakkam, Palani-Rajan & Kumar, P. C. & Riddick, Leigh A., 1998. "The impact of cash flows and firm size on investment: The international evidence," Journal of Banking & Finance, Elsevier, vol. 22(3), pages 293-320, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alexander Cobham, "undated". "Capital Account Liberalisation and Poverty," QEH Working Papers qehwps70, Queen Elizabeth House, University of Oxford.
    2. Joseph Owusu1 & Emmanuel Kwabena Anin & Solomon Gbene Zaato, 2013. "An Assessment of the Operations of Rotational Savings and Credit Association in the Kumasi Metropolis, Ghana," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 3(7), pages 150-159, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ghosal, Vivek & Ye, Yang, 2019. "The impact of uncertainty on the number of businesses," Journal of Economics and Business, Elsevier, vol. 105(C).
    2. Ferrando, Annalisa & Martinez-Carrascal, Carmen & Coluzzi, Chiara, 2009. "Financing obstacles and growth: an analysis for euro area non-financial corporations," Working Paper Series 997, European Central Bank.
    3. Sangeeta Pratap & Silvio Rendon, 2003. "Firm Investment in Imperfect Capital Markets: A Structural Estimation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 513-545, July.
    4. Antal-Pomázi, Krisztina, 2011. "A finanszírozási források szerepe a kis- és középvállalkozások növekedésében [The role of sources of finance in the growth of small and medium-sized enterprises]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(3), pages 275-295.
    5. Marcel Gérard & Frédéric Verscueren, 2002. "Finance, uncertainty and investment: assessing the gains and losses of a generalized non linear structural approach using Belgian panel data," Working Paper Research 26, National Bank of Belgium.
    6. Strebulaev, Ilya A. & Whited, Toni M., 2012. "Dynamic Models and Structural Estimation in Corporate Finance," Foundations and Trends(R) in Finance, now publishers, vol. 6(1–2), pages 1-163, November.
    7. Coad, Alex & Segarra, Agustí & Teruel, Mercedes, 2013. "Like milk or wine: Does firm performance improve with age?," Structural Change and Economic Dynamics, Elsevier, vol. 24(C), pages 173-189.
    8. Geurts, Karen & Van Biesebroeck, Johannes, 2016. "Firm creation and post-entry dynamics of de novo entrants," International Journal of Industrial Organization, Elsevier, vol. 49(C), pages 59-104.
    9. Tomat, Gian Maria, 2008. "Modeling the Effects of Financial Constraints on Firm's Investment," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 2, pages 1-26.
    10. Lensink, Robert & Sterken, Elmer, 2000. "Capital Market Imperfections, Uncertainty and Corporate Investment in the Czech Republic," Economic Change and Restructuring, Springer, vol. 33(1-2), pages 53-70.
    11. Bolton, Patrick & Li, Ye & Wang, Neng & Yang, Jinqiang, 2020. "Dynamic Banking and the Value of Deposits," Working Paper Series 2020-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    12. Sasan Bakhtiari & Robert Breunig & Lisa Magnani & Jacquelyn Zhang, 2020. "Financial Constraints and Small and Medium Enterprises: A Review," The Economic Record, The Economic Society of Australia, vol. 96(315), pages 506-523, December.
    13. Costas Arkolakis, 2016. "A Unified Theory of Firm Selection and Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(1), pages 89-155.
    14. Ulf von Kalckreuth, 2003. "Exploring the role of uncertainty for corporate investment decisions in Germany," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(II), pages 173-206, June.
    15. repec:dgr:rugsom:99e51 is not listed on IDEAS
    16. Ushijima, Tatsuo, 2005. "Internal capital market and the growth and survival of Japanese plants in the United States," Journal of the Japanese and International Economies, Elsevier, vol. 19(3), pages 366-385, September.
    17. Giulio Bottazzi & Angelo Secchi & Federico Tamagni, 2014. "Financial constraints and firm dynamics," Small Business Economics, Springer, vol. 42(1), pages 99-116, January.
    18. Canarella, Giorgio & Miller, Stephen M., 2018. "The determinants of growth in the U.S. information and communication technology (ICT) industry: A firm-level analysis," Economic Modelling, Elsevier, vol. 70(C), pages 259-271.
    19. Carlos Carreira & Filipe Silva, 2010. "No Deep Pockets: Some Stylized Empirical Results On Firms’ Financial Constraints," Journal of Economic Surveys, Wiley Blackwell, vol. 24(4), pages 731-753, September.
    20. Huynh, Kim P. & Petrunia, Robert J., 2010. "Age effects, leverage and firm growth," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 1003-1013, May.
    21. Enrico Santarelli & Marco Vivarelli, 2007. "Entrepreneurship and the process of firms’ entry, survival and growth," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 16(3), pages 455-488, June.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:qeh:qehwps:qehwps39. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: IT Support (email available below). General contact details of provider: https://edirc.repec.org/data/qehoxuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.