A Stochastic Model of Investment, Marginal q and the Market Value of theFirm / Andrew B. Abel.

Format:

Book

Author/Creator:

Abel, Andrew B.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w1484.

NBER working paper series no. w1484

Language:

English

Subjects (All):

Investments Mathematical models.

Investments.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1984.

Cambridge, Mass. : National Bureau of Economic Research, 1984.

Summary:

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.

Notes:

Print version record

October 1984.