Knowledge Cycles and Corporate Investment

65 Pages Posted: 11 Jul 2019 Last revised: 29 May 2020

See all articles by Maria Cecilia Bustamante

Maria Cecilia Bustamante

University of Maryland - Department of Finance

Julien Cujean

Institute for Financial Management

Laurent Frésard

University of Lugano; Swiss Finance Institute

Multiple version iconThere are 2 versions of this paper

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

Bustamante, Maria Cecilia and Cujean, Julien and Frésard, Laurent, Knowledge Cycles and Corporate Investment (May 28, 2020). Available at SSRN: or

Maria Cecilia Bustamante

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

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Julien Cujean (Contact Author)

Institute for Financial Management ( email )

Gesellschaftsstrasse 49
Bern, BERN 3001
3012 (Fax)

Laurent Frésard

University of Lugano ( email )

Lugano, 900

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

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