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Article: The optimal time to make a risky investment under a permanent exit option

TitleThe optimal time to make a risky investment under a permanent exit option
Authors
Issue Date2019
Citation
Journal of Intelligent Manufacturing, 2019, v. 30, p. 2669-2680 How to Cite?
AbstractWe study an optimal investment policy of a risky project when there exists the possibility that a firm may permanently exit the business under deeply deteriorated market conditions in the future. To capture the riskiness of the investment return rate, a Geometric Brownian motion is adopted to model the firm’s profit stream. Applying the real options framework, this paper aims at characterizing the firm’s optimal investment policy of the risky project under permanent exit option. It is shown that the investment threshold is no longer a monotonic function of the market uncertainty. Specifically, the investment threshold can decrease with market uncertainty for moderate uncertainty. And the investment threshold will eventually increase with market uncertainty if the uncertainty becomes sufficiently high. Extensive numerical experiments are conducted to check the robustness of the theoretic results. Some managerial implications are derived for investment decisions under the exit option.
Persistent Identifierhttp://hdl.handle.net/10722/238656

 

DC FieldValueLanguage
dc.contributor.authorLi, Q-
dc.contributor.authorWang, J-
dc.contributor.authorNi, J-
dc.contributor.authorChu, LK-
dc.contributor.authorLi, CD-
dc.date.accessioned2017-02-20T01:24:24Z-
dc.date.available2017-02-20T01:24:24Z-
dc.date.issued2019-
dc.identifier.citationJournal of Intelligent Manufacturing, 2019, v. 30, p. 2669-2680-
dc.identifier.urihttp://hdl.handle.net/10722/238656-
dc.description.abstractWe study an optimal investment policy of a risky project when there exists the possibility that a firm may permanently exit the business under deeply deteriorated market conditions in the future. To capture the riskiness of the investment return rate, a Geometric Brownian motion is adopted to model the firm’s profit stream. Applying the real options framework, this paper aims at characterizing the firm’s optimal investment policy of the risky project under permanent exit option. It is shown that the investment threshold is no longer a monotonic function of the market uncertainty. Specifically, the investment threshold can decrease with market uncertainty for moderate uncertainty. And the investment threshold will eventually increase with market uncertainty if the uncertainty becomes sufficiently high. Extensive numerical experiments are conducted to check the robustness of the theoretic results. Some managerial implications are derived for investment decisions under the exit option.-
dc.languageeng-
dc.relation.ispartofJournal of Intelligent Manufacturing-
dc.titleThe optimal time to make a risky investment under a permanent exit option-
dc.typeArticle-
dc.identifier.emailLi, Q: liqiang@connect.hku.hk-
dc.identifier.emailWang, J: jwwang@hku.hk-
dc.identifier.emailNi, J: efdsafgz@hku.hk-
dc.identifier.emailChu, LK: lkchu@hkucc.hku.hk-
dc.identifier.authorityWang, J=rp01888-
dc.identifier.authorityChu, LK=rp00113-
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1007/s10845-017-1299-1-
dc.identifier.scopuseid_2-s2.0-85011933866-
dc.identifier.hkuros271404-
dc.identifier.volume30-
dc.identifier.spage2669-
dc.identifier.epage2680-

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