TY  - JOUR
AU  - Abel,Andrew B.
AU  - Eberly,Janice C.
TI  - An Exact Soultion for the Investment and Market Value of a Firm Facing Uncertainty, Adjustment Costs, and Irreversibility
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4412
PY  - 1998
Y2  - February 1998
UR  - http://www.nber.org/papers/w4412
L1  - http://www.nber.org/papers/w4412.pdf
N1  - Author contact info:
Andrew B. Abel
Wharton School
University of Pennsylvania
2315 Steinberg Hall - Dietrich Hall
Philadelphia, PA  19104-6367
Tel: 215/898-4801
Fax: 215/573-7244
E-Mail: abel@wharton.upenn.edu

Janice C. Eberly
Northwestern University
Department of Finance
Kellogg School of Management
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/467-1840
Fax: 847/491-5719
E-Mail: eberly@kellogg.northwestern.edu
AB  - 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.
ER  -