Working Paper: CEPR ID: DP14152
Authors: Julien Cujean; Maria Cecilia Bustamante; Laurent Fresard
Abstract: We propose a theory of how the process of knowledge creation within fi rms 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 fi rms' investment. Because risky experimentation makes fi rms 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 fi nd empirical support for the knowledge channel using a text-based measure of knowledge cycles from public fi rms. 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 Codes: D24; D83; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| knowledge accumulation (O36) | investment (G31) |
| investment (G31) | marginal q (C21) |
| early knowledge cycle (O36) | investment (G31) |
| knowledge accumulation (O36) | marginal value of capital (E22) |
| knowledge accumulation (O36) | investment (post-exploration) (G31) |
| knowledge channel (O36) | investment behavior (G11) |
| knowledge channel (O36) | sensitivity of investment to q (G31) |