Diminishing Returns to Investment Vis-À-Vis Firm Age
25 Pages Posted: 26 Sep 2009
Date Written: September 25, 2009
Abstract
To the extent that firm information provides data to complete markets, firm characteristics determine value to investors. Contrarily, investors are motivated by prospect theory to bid up firm prices without information especially concerning diminishing returns to investments. The valuation effect of investments is highly subjective in the case of R&D (growth options) and more concrete in regards to capital expenditures (assets-in-place). This study contributes to the investment knowledge frontier by analyzing diminishing returns to research and development (R&D) and capital expenditures in regards to a firm’s age.
Keywords: Investment , Diminishing Returns, Firm Age, Life Cycle
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