Investment Options and the Business Cycle

Boyan Jovanovic ()

No 66, 2006 Meeting Papers from Society for Economic Dynamics

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

Keywords: Volatility; Tobin's q (search for similar items in EconPapers)
JEL-codes: E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-mac
Date: 2006-12-03
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Working Paper: Investment Options and the Business Cycle (2007)
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