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Investment Options and the Business Cycle

  • Boyan Jovanovic

    ()

    (Economics New York University)

A firm has investment options that it may use up immediately, or store for future use. A patent, e.g., is an option to implement an idea via a product or process innovation. Other investment options are protected by secrecy. An investment option is a profit opportunity that requires an investment to implement. Because investment options are scarce, Tobin’s q is always above unity. When the stock of these options rises, the value of stock market falls, a result that exactly invalidates the use of the stock market as a positive indicator of the stock of intangibles. Finally, the stock market alone ensures that equilibrium is efficient

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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 66.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:66
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