Corporate Investment Under Uncertainty And the Neoclassical Model
Corporate Investment Under Uncertainty And the Neoclassical Model
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Capital markets such an ability is probably insignificant.
The identification problem just discussed is not dependent on the existence of non-competitive aspects of the capital market. We now show the same problem can exist in a perfectly competitive capital market in the CAPM but now with costs of adjustment. The value equation becomes: V j ' R [FF ( K ' L ) " *G(K, I) - wL + v(l-6)K - Xo ] - I (32) The first order conditions are similar to (3) and (4) but with expected price: av PF - PG - PG ...+ v(l-6) g . - -5 L_J 1 (33 ) av ff t ~ w g - - -V- (34) From (33) we have: V + PGL 1+ -=? + (33a) Equation (33a) has the following interesting implication. In a world of uncertainty with a perfectly competitive capital market, the absolute amount of value-maximizing investment and output by the firm will be equal -18- to that of a certain world. This is seen by comparing (33a) with (6). The firm does not take explicit account of risk. However, that firm's market value to risk averse investors will be: (a) strictly less (for a iM > ^ than the market va l ue under certainty as seen by the required risk premium in equation (32); (b) strictly greater for a
What to read after Corporate Investment Under Uncertainty And the Neoclassical Model?
You can find similar books in the "Read Also" column, or choose other free books by James L Paddock to read onlineMoreLess
To quickly assess the difficulty of the text, read a short excerpt:
Capital markets such an ability is probably insignificant.
The identification problem just discussed is not dependent on the existence of non-competitive aspects of the capital market. We now show the same problem can exist in a perfectly competitive capital market in the CAPM but now with costs of adjustment. The value equation becomes: V j ' R [FF ( K ' L ) " *G(K, I) - wL + v(l-6)K - Xo ] - I (32) The first order conditions are similar to (3) and (4) but with expected price: av PF - PG - PG ...+ v(l-6) g . - -5 L_J 1 (33 ) av ff t ~ w g - - -V- (34) From (33) we have: V + PGL 1+ -=? + (33a) Equation (33a) has the following interesting implication. In a world of uncertainty with a perfectly competitive capital market, the absolute amount of value-maximizing investment and output by the firm will be equal -18- to that of a certain world. This is seen by comparing (33a) with (6). The firm does not take explicit account of risk. However, that firm's market value to risk averse investors will be: (a) strictly less (for a iM > ^ than the market va l ue under certainty as seen by the required risk premium in equation (32); (b) strictly greater for a
What to read after Corporate Investment Under Uncertainty And the Neoclassical Model?
You can find similar books in the "Read Also" column, or choose other free books by James L Paddock to read onlineMoreLess
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