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Investment Options and the Business Cycle

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Listed author(s):
  • Boyan Jovanovic

    ()

    (Economics New York University)

Abstract

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
Handle: RePEc:red:sed006:66
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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Keywords: Volatility; Tobin's q;

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Find related papers by JEL classification:
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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Cited by:

  1. Nancy Stokey, 2016. "Wait-and See: Investment Options under Policy Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 246-265, July.
  2. Rousakis, Michael, 2012. "Implementation Cycles : Investment-Specific Technological Change and the Length of Patents," The Warwick Economics Research Paper Series (TWERPS) 983, University of Warwick, Department of Economics.
  3. Nancy Stokey, 2013. "Uncertainty and Investment Options," 2013 Meeting Papers 251, Society for Economic Dynamics.
  4. Ohanian, Lee E. & Prescott, Edward C. & Stokey, Nancy L., 2009. "Introduction to dynamic general equilibrium," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2235-2246, November.
  5. Lee, Junghoon, 2016. "The impact of idiosyncratic uncertainty when investment opportunities are endogenous," Journal of Economic Dynamics and Control, Elsevier, vol. 65(C), pages 105-124.
  6. Nancy L. Stokey, 2013. "Wait-and-See: Investment Options under Policy Uncertainty," NBER Working Papers 19630, National Bureau of Economic Research, Inc.

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