The Present Value of Profits and Cyclical Movements in Investment

53 Pages Posted: 27 Dec 2001 Last revised: 28 Jul 2010

See all articles by Andrew B. Abel

Andrew B. Abel

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Date Written: May 1983

Abstract

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.

Suggested Citation

Abel, Andrew B. and Blanchard, Olivier J., The Present Value of Profits and Cyclical Movements in Investment (May 1983). NBER Working Paper No. w1122. Available at SSRN: https://ssrn.com/abstract=294714

Andrew B. Abel (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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HOME PAGE: http://finance.wharton.upenn.edu/~abel/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Olivier J. Blanchard

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

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