Knowledge Cycles and Corporate Investment
65 Pages Posted: 11 Jul 2019 Last revised: 29 May 2020
Date Written: May 28, 2020
Investment is a means to experiment with technologies, creating valuable knowledge for firms. We analyze the feedback interaction between investment and knowledge through endogenous cycles of experimentation and exploration. Because experimentation is uncertain, firms become averse to investing when knowledge is scarce and q is high, overturning neoclassical insights. Investment is increasing in knowledge and its relation with q varies over the knowledge cycle. Experimentation further shortens cycle length. Using a text-based proxy for firms' knowledge cycles, we provide evidence supporting these novel predictions. Shorter knowledge cycles could explain weak aggregate investment despite high valuations in recent years.
Keywords: Investment, Experimentation, Exploration, Knowledge, Experimentation Aversion, Intangibles, Knowledge Capital
JEL Classification: G31,D83
Suggested Citation: Suggested Citation