A Stochastic Model of Investment, Marginal q and the Market Value of theFirm
This paper presents closed-form solutions for the investment and valuation of a competitive firm with a Cobb-Douglas production function and a constant elasticity adjustment cost function in the presence of stochastic prices for output and inputs. The value of the firm is a linear function of the capital stock. The optimal rate of investmentis an increasing function of the slope of the value function with respect to the capital stock (marginal q). A mean preserving spread of the distribution of future price increases investment. An increase in the scale of the random component of a price can increase, decrease or not affect the rate of investment depending on the sign of the covariance of this price with a weighted average of all prices.
|Date of creation:||Oct 1984|
|Publication status:||published as Abel, Andrew B. "A Stochastic Model of Investment, Marginal q and the Market Value of the Firm," International Economic Review, Vol. 26, No. 2, June 1985, pp. 305-322.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 509-534, June.
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- Pindyck, Robert S., 1980. "Adjustment cost, demand uncertainty, and the behavior of the firm," Working papers 1112-80A., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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- Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321-321. Full references (including those not matched with items on IDEAS)
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