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

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Date Written: November 2019


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:

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

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Julien Cujean

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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