An Exact Solution for the Investment and Market Value of Firm Facing Uncertainty, Adjustment Costs, and Irreversibility

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Finance Papers
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investment
irreversibility
Agricultural and Resource Economics
Finance and Financial Management
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Abel, Andrew B
Eberly, Janice C
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This paper derives closed-form solutions for the investment and value of a competitive firm with a constant-returns-to-scale production function and convex costs of adjustment. Solutions are derived for the case of irreversible investment as well as for reversible investment. Optimal investment is a non-decreasing function of q, the shadow value of capital. Relative to the case of reversible investment, the introduction of irreversibility does not affect q, but it reduces the fundamental value of the firm.

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1997-05-01
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Journal of Economic Dynamics and Control
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