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Article: The effects of irreversibility on the timing and intensity of lumpy investment

TitleThe effects of irreversibility on the timing and intensity of lumpy investment
Authors
KeywordsInvestment intensity
Investment timing
Irreversibility
Real options
Issue Date2010
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/ecmod
Citation
Economic Modelling, 2010, v. 27 n. 1, p. 97-102 How to Cite?
AbstractThis paper examines how changes in irreversibility of investment affect the timing and intensity of lumpy 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 a partially reversible 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 instant when the investment option is exercised. We show that higher irreversibility of investment induces the firm to raise its optimal investment trigger, thereby deferring the undertaking of the project. Furthermore, we show that changes in irreversibility of investment have no impact on the firm's optimal investment intensity due to two opposing effects that exactly offset each other. Finally, we show that higher irreversibility of investment reduces the value of the investment option and, therefore, makes the firm less valuable. © 2009 Elsevier B.V. All rights reserved.
Persistent Identifierhttp://hdl.handle.net/10722/85537
ISSN
2015 Impact Factor: 0.997
2015 SCImago Journal Rankings: 0.815
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorWong, KPen_HK
dc.date.accessioned2010-09-06T09:06:19Z-
dc.date.available2010-09-06T09:06:19Z-
dc.date.issued2010en_HK
dc.identifier.citationEconomic Modelling, 2010, v. 27 n. 1, p. 97-102en_HK
dc.identifier.issn0264-9993en_HK
dc.identifier.urihttp://hdl.handle.net/10722/85537-
dc.description.abstractThis paper examines how changes in irreversibility of investment affect the timing and intensity of lumpy 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 a partially reversible 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 instant when the investment option is exercised. We show that higher irreversibility of investment induces the firm to raise its optimal investment trigger, thereby deferring the undertaking of the project. Furthermore, we show that changes in irreversibility of investment have no impact on the firm's optimal investment intensity due to two opposing effects that exactly offset each other. Finally, we show that higher irreversibility of investment reduces the value of the investment option and, therefore, makes the firm less valuable. © 2009 Elsevier B.V. All rights reserved.en_HK
dc.languageengen_HK
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/ecmoden_HK
dc.relation.ispartofEconomic Modellingen_HK
dc.subjectInvestment intensityen_HK
dc.subjectInvestment timingen_HK
dc.subjectIrreversibilityen_HK
dc.subjectReal optionsen_HK
dc.titleThe effects of irreversibility on the timing and intensity of lumpy investmenten_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=0264-9993&volume=27&issue=1&spage=97&epage=102&date=2010&atitle=The+effects+of+irreversibility+on+the+timing+and+intensity+of+lumpy+investmenten_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.econmod.2009.07.028en_HK
dc.identifier.scopuseid_2-s2.0-71149089180en_HK
dc.identifier.hkuros168280en_HK
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-71149089180&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume27en_HK
dc.identifier.issue1en_HK
dc.identifier.spage97en_HK
dc.identifier.epage102en_HK
dc.identifier.isiWOS:000273705100012-
dc.publisher.placeNetherlandsen_HK
dc.identifier.scopusauthoridWong, KP=7404759417en_HK
dc.identifier.citeulike5770256-

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