Prediction Ability and Investment under Uncertainty

Abstract

This paper provides a theoretical framework for analyzing one of the most important intangible assets in a firm: the ability to predict profitable investment opportunities. This paper shows theoretically how to measure the accuracy of information used to predict opportunities, and estimates the value of information in the context of a firm's investment decision problem. Empirical study confirms the theoretical results of the model: (1) prediction ability has a large positive impact on firm's expected profits; and (2) prediction ability increases the mean and the variance of the growth rate of a firm's capital stock.