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Article: The effects of abandonment options on operating leverage and investment timing

TitleThe effects of abandonment options on operating leverage and investment timing
Authors
KeywordsAbandonment options
Investment timing
Operating leverage
Issue Date2009
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/iref
Citation
International Review Of Economics And Finance, 2009, v. 18 n. 1, p. 162-171 How to Cite?
AbstractThis paper examines how the presence of an abandonment option affects a firm's investment decision in general, and its operating leverage in particular. We show that the value of the abandonment option is a decreasing function of the firm's operating leverage. Upon the introduction of the abandonment option, the firm as such optimally lowers its operating leverage. We further show that there are direct and indirect effects of the abandonment option on the firm's optimal investment trigger, which act against each other. First, the ability to shut down production offers downside protection to the firm, thereby making the firm more eager to exercise the investment option. This is the negative direct effect that pushes down the investment trigger. Second, introducing the abandonment option to the firm induces the firm to lower its operating leverage, thereby making the firm more reluctant to exercise the investment option. This is the positive indirect effect that lifts up the investment trigger. We numerically verify that the overall effect of the abandonment option on the firm's optimal investment trigger is negative. © 2007 Elsevier Inc. All rights reserved.
Persistent Identifierhttp://hdl.handle.net/10722/60162
ISSN
2015 Impact Factor: 1.846
2015 SCImago Journal Rankings: 0.890
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorWong, KPen_HK
dc.date.accessioned2010-05-31T04:05:02Z-
dc.date.available2010-05-31T04:05:02Z-
dc.date.issued2009en_HK
dc.identifier.citationInternational Review Of Economics And Finance, 2009, v. 18 n. 1, p. 162-171en_HK
dc.identifier.issn1059-0560en_HK
dc.identifier.urihttp://hdl.handle.net/10722/60162-
dc.description.abstractThis paper examines how the presence of an abandonment option affects a firm's investment decision in general, and its operating leverage in particular. We show that the value of the abandonment option is a decreasing function of the firm's operating leverage. Upon the introduction of the abandonment option, the firm as such optimally lowers its operating leverage. We further show that there are direct and indirect effects of the abandonment option on the firm's optimal investment trigger, which act against each other. First, the ability to shut down production offers downside protection to the firm, thereby making the firm more eager to exercise the investment option. This is the negative direct effect that pushes down the investment trigger. Second, introducing the abandonment option to the firm induces the firm to lower its operating leverage, thereby making the firm more reluctant to exercise the investment option. This is the positive indirect effect that lifts up the investment trigger. We numerically verify that the overall effect of the abandonment option on the firm's optimal investment trigger is negative. © 2007 Elsevier Inc. All rights reserved.en_HK
dc.languageengen_HK
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/irefen_HK
dc.relation.ispartofInternational Review of Economics and Financeen_HK
dc.subjectAbandonment optionsen_HK
dc.subjectInvestment timingen_HK
dc.subjectOperating leverageen_HK
dc.titleThe effects of abandonment options on operating leverage and investment timingen_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.doi10.1016/j.iref.2007.09.004en_HK
dc.identifier.scopuseid_2-s2.0-56949096540en_HK
dc.identifier.hkuros153962en_HK
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-56949096540&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume18en_HK
dc.identifier.issue1en_HK
dc.identifier.spage162en_HK
dc.identifier.epage171en_HK
dc.identifier.isiWOS:000262076700018-
dc.publisher.placeNetherlandsen_HK
dc.identifier.scopusauthoridWong, KP=7404759417en_HK

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