Using age as a proxy for learning within a firm, we show that the investments of firms with younger projects react more to profit realizations. With time, firms learn about their long-term quality, and their investment decisions become less influenced by the random shocks they receive. We also show that the learning process depends on the volatility of the economic environment. In more volatile industries, firms observe more noise and less signal from profit realizations. Their investments are therefore less influenced by profits. These new empirical results are consistent with a Tobin’s q framework augmented with Bayesian learning.

In capital-intensive industries, firms face complicated multi-staged financing, investment, and production decisions under the watchful eye of existing and potential industry rivals. In various representations of this environment, we show that a first-mover advantage in debt weakly dominates a first-mover advantage in capacity. Without a first-mover advantage in debt, the incumbent may suffer a dead-weight loss. When both the entrant and incumbent deploy debt prior to capacity, a first-mover in capacity benefits from softer competition. With a long-purse debt cost, leading in debt still remains advantageous.