The Present Value of Profits and Cyclical Movements in Investment
53 Pages Posted: 27 Dec 2001 Last revised: 28 Jul 2010
Date Written: May 1983
Most of the empirical work on investment is based on the existence of a relation between investment and the expected present val of marginal profits.Thus, in this paper we compute such a present value series, under various assumptions about demand and technology and examine its relation to investment.We find that variations in this present value series are, surprisingly,due more to variations in the cost of capital than to variations in marginal profit. We also find that the present value series, although significantly related to investment, still leaves unexplained a large, serially correlated fraction of investment.
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