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Making Bad Decisions: firm size and investment under uncertainty

  • Alexander Cobham

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.

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File URL: http://www3.qeh.ox.ac.uk/RePEc/qeh/qehwps/qehwps39.pdf
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Paper provided by Queen Elizabeth House, University of Oxford in its series QEH Working Papers with number qehwps39.

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Handle: RePEc:qeh:qehwps:qehwps39
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  1. Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, vol. 5(2), pages 258-266, October.
  2. 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.
  3. Allen N. Berger & Anthony Saunders & Joseph M. Scalise & Gregory F. Udell, 1998. "The Effects of Bank Mergers and Acquisitions on Small Business Lending," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-007, New York University, Leonard N. Stern School of Business-.
  4. 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.
  5. 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.
  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 191-99, May.
  7. Thomas F. Cooley & Vincenzo Quadrini, 2001. "Financial Markets and Firm Dynamics," American Economic Review, American Economic Association, vol. 91(5), pages 1286-1310, December.
  8. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  9. Cabral, Luís M B & Mata, José, 2001. "On the Evolution of the Firm Size Distribution: Facts and Theory," CEPR Discussion Papers 3045, C.E.P.R. Discussion Papers.
  10. Alan Carruth & Andy Dickerson & Andrew Henley, 1998. "What Do We Know About Investment Under Uncertainty?," Studies in Economics 9804, School of Economics, University of Kent.
  11. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
  12. Evans, David S., 1986. "The Relationship Between Firm Growth, Size, and Age: Estimates for 100 Manufacturing Industries," Working Papers 86-33, C.V. Starr Center for Applied Economics, New York University.
  13. Cabral, Luis, 1995. "Sunk Costs, Firm Size and Firm Growth," Journal of Industrial Economics, Wiley Blackwell, vol. 43(2), pages 161-72, June.
  14. Bronwyn H. Hall, 1986. "The Relationship Between Firm Size and Firm Growth in the U.S. Manufacturing Sector," NBER Working Papers 1965, National Bureau of Economic Research, Inc.
  15. Alexander Cobham, . "The Financing and Technology Decisions of SMEs: I. Finance as a Determinant of Investment," QEH Working Papers qehwps24, Queen Elizabeth House, University of Oxford.
  16. Alexander Cobham, . "The Financing and Technology Decisions of SMEs: II. Technology and Policy," QEH Working Papers qehwps25, Queen Elizabeth House, University of Oxford.
  17. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  18. 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.
  19. 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.
  20. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  21. 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 194-99, May.
  22. 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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