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More on Bernanke's “Bad News Principle”

Yishay Maoz ()

General Economics and Teaching from University Library of Munich, Germany

Abstract: The role that Bernanke’s Bad News Principle plays in the modern theory of investment under uncertainty is analyzed. The analysis shows that the actual investment dilemma is that by delaying investment firms trade off a higher present value of earnings for a lower present value of the investment cost, in contrast to previous interpretations of this dilemma. The economic interpretation of the Smooth Pasting Condition is clarified too: it represents the trade-off mentioned above. I also show that investment triggers may stay intact despite changes in the profit process, if the changes are restricted to the range of sufficiently high profits.

Keywords: Investment; Uncertainty; Option Value; Competition (search for similar items in EconPapers)
JEL-codes: D41 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic
Date: 2005-10-09
Note: Type of Document - pdf; pages: 30
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