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Investment Options and the Business Cycle

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  • 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

Suggested Citation

  • Boyan Jovanovic, 2006. "Investment Options and the Business Cycle," 2006 Meeting Papers 66, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:66
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    Cited by:

    1. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 304-345.
    2. Shouyong Shi & Christine Tewfik, 2015. "Financial Frictions, Investment Delay, and Asset Market Interventions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S2), pages 155-196, June.
    3. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2008. "Monetary Policy and Business Cycles with Endogenous Entry and Product Variety," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 299-353, National Bureau of Economic Research, Inc.
    4. 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.
    5. 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.
    6. Lesley Welman & Sanette LA Ferreira, 2016. "The co-evolution of Saldanha Bay (town and hinterland) and its Port," Local Economy, London South Bank University, vol. 31(1-2), pages 219-233, February.
    7. Nancy Stokey, 2013. "Uncertainty and Investment Options," 2013 Meeting Papers 251, Society for Economic Dynamics.
    8. Rousakis, Michael, 2012. "Implementation Cycles: Investment-Specific Technological Change and the Length of Patents," Economic Research Papers 270656, University of Warwick - Department of Economics.
    9. 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.
    10. 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.
    11. Levine, Oliver, 2017. "Acquiring growth," Journal of Financial Economics, Elsevier, vol. 126(2), pages 300-319.
    12. Nancy L. Stokey, 2013. "Wait-and-See: Investment Options under Policy Uncertainty," NBER Working Papers 19630, National Bureau of Economic Research, Inc.
    13. Jiaxing You & Ling Lin & Juanjuan Huang & Min Xiao, 2020. "When is cash king? International evidence on the value of cash across the business cycle," Review of Quantitative Finance and Accounting, Springer, vol. 54(3), pages 1101-1131, April.

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    More about this item

    Keywords

    Volatility; Tobin's q;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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