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Article: The effects of abandonment options on investment timing and intensity

TitleThe effects of abandonment options on investment timing and intensity
Authors
KeywordsAbandonment options
Investment intensity
Investment timing
Issue Date2012
PublisherBlackwell Publishing Ltd. The Journal's web site is located at http://www.blackwellpublishing.com/journals/BOER
Citation
Bulletin Of Economic Research, 2012, v. 64 n. 3, p. 305-318 How to Cite?
AbstractThis paper examines how the presence of an abandonment option affects the timing and intensity of a firm's investment. We develop a continuous-time model wherein a firm is endowed with a perpetual option to invest in a project at any time by incurring an investment cost at that instant. The amount of the investment cost is directly related to the intensity of investment that is endogenously chosen by the firm at the investment instant. The project generates a stream of stochastic revenue flows with a concomitant stream of constant cost flows, both of which increase with the investment intensity. We show that allowing the firm to make an irreversible decision to abandon the project does not affect the firm's optimal investment intensity if the investment cost is totally reversible. Otherwise, the option to abandon the project induces the firm to choose a lower level of investment intensity. Furthermore, we show that the presence of the abandonment option pushes down the firm's optimal investment trigger, thereby hastening the undertaking of the project. © 2011 The Author. Bulletin of Economic Research © 2011 Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research.
Persistent Identifierhttp://hdl.handle.net/10722/152928
ISSN
2015 Impact Factor: 0.261
2015 SCImago Journal Rankings: 0.280
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorWong, KPen_HK
dc.date.accessioned2012-07-16T09:51:54Z-
dc.date.available2012-07-16T09:51:54Z-
dc.date.issued2012en_HK
dc.identifier.citationBulletin Of Economic Research, 2012, v. 64 n. 3, p. 305-318en_HK
dc.identifier.issn0307-3378en_HK
dc.identifier.urihttp://hdl.handle.net/10722/152928-
dc.description.abstractThis paper examines how the presence of an abandonment option affects the timing and intensity of a firm's investment. We develop a continuous-time model wherein a firm is endowed with a perpetual option to invest in a project at any time by incurring an investment cost at that instant. The amount of the investment cost is directly related to the intensity of investment that is endogenously chosen by the firm at the investment instant. The project generates a stream of stochastic revenue flows with a concomitant stream of constant cost flows, both of which increase with the investment intensity. We show that allowing the firm to make an irreversible decision to abandon the project does not affect the firm's optimal investment intensity if the investment cost is totally reversible. Otherwise, the option to abandon the project induces the firm to choose a lower level of investment intensity. Furthermore, we show that the presence of the abandonment option pushes down the firm's optimal investment trigger, thereby hastening the undertaking of the project. © 2011 The Author. Bulletin of Economic Research © 2011 Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research.en_HK
dc.languageengen_US
dc.publisherBlackwell Publishing Ltd. The Journal's web site is located at http://www.blackwellpublishing.com/journals/BOERen_HK
dc.relation.ispartofBulletin of Economic Researchen_HK
dc.rightsThe definitive version is available at www.blackwell-synergy.comen_US
dc.subjectAbandonment optionsen_HK
dc.subjectInvestment intensityen_HK
dc.subjectInvestment timingen_HK
dc.titleThe effects of abandonment options on investment timing and intensityen_HK
dc.typeArticleen_HK
dc.identifier.emailWong, KP: kpwongc@hkucc.hku.hken_HK
dc.identifier.authorityWong, KP=rp01112en_HK
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1111/j.1467-8586.2011.00399.xen_HK
dc.identifier.scopuseid_2-s2.0-84863549149en_HK
dc.identifier.hkuros201388en_US
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-84863549149&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume64en_HK
dc.identifier.issue3en_HK
dc.identifier.spage305en_HK
dc.identifier.epage318en_HK
dc.identifier.isiWOS:000305991600001-
dc.publisher.placeUnited Kingdomen_HK
dc.identifier.scopusauthoridWong, KP=7404759417en_HK

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