Sunk Costs and Firm Value Variability: Theory and Evidence

• Published in: The American economic review Vol. 88; no. 1; pp. 307 - 313
• Main Authors: Lambson, Val Eugene, Jensen, Farrell E.
• Format: Journal Article
• Language: English
• Published: Menasha, Wis American Economic Association 01-03-1998
• Subjects: Active learning; Average cost; Book value; Capital costs; Competition; Cost analysis; Cost of entry; Costs; Economic models; Economic theory; Firm value; Industrial dynamics; Industrial research; Industry; Investments; Learning; Modeling; Observational learning; Productivity; Proxy reporting; Proxy statements; R&D; Regression analysis; Research & development; Scrap value; Stock exchanges; Studies; Sunk costs; Value analysis
• ISSN: 0002-8282; 1944-7981

Dynamic competitive models are interesting tools for studying industry behavior over time. Although there is some overlap, such models of industry evolution can be divided into two classes: learning models and external shocks models. This paper reviews the predictions of dynamic competitive models regarding the variability of firm value and subjects them to empirical testing. Learning models predict that intra-industry firm value variability will be greater in higher sunk cost industries. External shocks models predict that the intertemporal firm value variability will be greater for firms in higher sunk cost industries. The empirical results are consistent with both the learning models and the external shocks models.