Knowledge Cycles and Corporate Investment

63 Pages Posted: 11 Jul 2019

See all articles by Maria Cecilia Bustamante

Maria Cecilia Bustamante

University of Maryland - Department of Finance

Julien Cujean

University of Maryland - Robert H. Smith School of Business

Laurent Frésard

Universita della Svizzera italiana (USI Lugano); Swiss Finance Institute

Date Written: July 11, 2019

Abstract

We propose a theory of how the process of knowledge creation within firms affects their investment decisions. Firms accumulate knowledge through successive rounds of experimentation in the form of capital expenditures, and reset knowledge when they explore new technologies. This process generates endogenous knowledge cycles, which govern firms' investment. Because risky experimentation makes firms information averse, investment increases in knowledge but Q decreases in knowledge. The relationship between investment and Q thus varies over the knowledge cycle and is strongest early in the cycle. We find empirical support for the knowledge channel using a text-based measure of knowledge cycles from public firms. The knowledge channel could explain why investment has been weak in recent years despite high valuation.

Keywords: Experimentation, Exploration, Investment, Knowledge, Information Aversion, Intangibles.

JEL Classification: G31,D83

Suggested Citation

Bustamante, Maria Cecilia and Cujean, Julien and Frésard, Laurent, Knowledge Cycles and Corporate Investment (July 11, 2019). Available at SSRN: https://ssrn.com/abstract=3418171 or http://dx.doi.org/10.2139/ssrn.3418171

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

HOME PAGE: http://https://sites.google.com/a/rhsmith.umd.edu/mcbustam/?pli=1

Julien Cujean (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Laurent Frésard

Universita della Svizzera italiana (USI Lugano) ( email )

Lugano, 900
Switzerland

Swiss Finance Institute ( email )

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

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