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INVESTMENT UNDER UNCERTAINTY: THE CAPITAL MARKET AND THE BEHAVIOR OF THE FIRM

Author: GREGORY KEITH DOW
Publisher: 1981.
Dissertation: Thesis (Ph. D.)--University OF MICHIGAN.
Edition/Format:   Thesis/dissertation : Thesis/dissertation : Manuscript : Microfilm   Archival Material : EnglishView all editions and formats
Database:WorldCat
Summary:
Barriers to entry in some industries have been attributed to capital market 'imperfections.' Various properties of the capital market have been suggested as sources of imperfection, and corresponding theories have emerged to explain why new investment is restrained as a result. One explanation for such constraints on investment rests on the possibility that outside financiers know less about the returns to
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Material Type: Thesis/dissertation, Manuscript
Document Type: Book, Archival Material
All Authors / Contributors: GREGORY KEITH DOW
OCLC Number: 68290821
Description: 194 p.

Abstract:

Barriers to entry in some industries have been attributed to capital market 'imperfections.' Various properties of the capital market have been suggested as sources of imperfection, and corresponding theories have emerged to explain why new investment is restrained as a result. One explanation for such constraints on investment rests on the possibility that outside financiers know less about the returns to investment than the entrepreneurs directly involved.

A model of investment under uncertainty is developed in order to address these issues. The model of the firm is set in continuous time, and all agents are regarded as expected present value maximizers. The firm's profit function shifts through time according to a stochastic differential equation. The quality of information about future returns is reflected by knowledge of the parameters of this equation. Under 'symmetric information, ' this knowledge is identical for all capital market participants.

While under 'asymmetric information, ' the firm's owner/entrepreneur has better knowledge of these parameters than any other economic agent.

When information is asymmetric, the capital market may impose a binding constraint on the firm's choice of an investment policy. This constraint establishes a relationship between the firm's predicted investment rate and financial variables, such as operating profit and debt. While the signs of these liquidity effects are generally ambiguous, the ambiguity is removed under certain conditions. Observed investment then exhibits features which are often attributed to 'capital market imperfections'

Investment occurs more rapidly for liquid firms, and more slowly when a firm's prospects are poorly understood by outsiders. Some procedures for detecting capital market constraints are also suggested.

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