An Exact Soultion for the Investment and Market Value of a Firm Facing Uncertainty, Adjustment Costs, and Irreversibility

Andrew Abel and Janice Eberly

No 4412, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper derives closed-form solutions for the investment and market value, under uncertainty, of competitive firms with constant returns to scale production and convex costs of adjustment. Solutions are derived for the case of irreversible investment as well as for reversible investment. Optimal investment is a non-decreasing function of q, the shadow value of capital. The conditions of optimality imply that q cannot contain a bubble; thus, optimal investment depends only on fundamentals. However, the value of the firm may contain a bubble that does not affect investment behavior. Relative to the case of reversible investment, the introduction of irreversibility does not affect q, but it reduces the fundamental market value of the firm.

JEL-codes: E22 (search for similar items in EconPapers)
Date: 1993-07
Note: DAE AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published as Journal of Economic Dynamics and Control, Vol. 21 (1997): 831-852.

Downloads: (external link)
http://www.nber.org/papers/w4412.pdf (application/pdf)

Related works:
Working Paper: An Exact Solution for the Investment and Market Value of a Firm Facing Uncertainty, Adjustment Costs, and Irreversibility
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:4412

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w4412

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().