Knowledge Cycles and Corporate Investment

66 Pages Posted: 4 Dec 2019

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: November 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 but Q decreases as knowledge accumulates. 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, Information Aversion, Intangibles, investment, Knowledge

Suggested Citation

Bustamante, Maria Cecilia and Cujean, Julien and Frésard, Laurent, Knowledge Cycles and Corporate Investment (November 2019). CEPR Discussion Paper No. DP14152, Available at SSRN: https://ssrn.com/abstract=3496641

Maria Cecilia Bustamante (Contact Author)

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

Institute for Financial Management ( email )

Gesellschaftsstrasse 49
Bern, BERN 3001
Switzerland
3012 (Fax)

Laurent Frésard

University of 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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
0
Abstract Views
119
PlumX Metrics