A Stochastic Model of Investment, Marginal q and the Market Value of theFirm

Andrew B. Abel

NBER Working Paper No. 1484 (Also Reprint No. r0674)
Issued in 1986
NBER Program(s):   EFG

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.

(839 K)

(453 K)

Published: Abel, Andrew B. "A Stochastic Model of Investment, Marginal q and the Market Value of the Firm," International Economic Review, Vol. 26, No. 2, June 1985, pp. 305-322.

This paper is available as PDF (839 K) or DjVu (453 K) (Download viewer) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX