On the investment–uncertainty relationship: A game theoretic real option approach
AbstractThis paper examines the effect of uncertainty on investment timing in a game theoretic real option model. We extend the settings of the related recent literature on investment timing under uncertainty by a more general assumption, i.e. the investment is also influenced by the actions of a second player. The results show that a U-shaped investment–uncertainty relationship generally sustains even for infinite-lived investment projects and proper defined cash flows. However, timing of an investment occurs inefficiently late. Moreover, we show that the influence of uncertainty on the associated first-mover advantage becomes ambiguous, too.
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Bibliographic InfoArticle provided by Elsevier in its journal Finance Research Letters.
Volume (Year): 11 (2014)
Issue (Month): 1 ()
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Web page: http://www.elsevier.com/locate/frl
Real option; Investment; Uncertainty; Managerial flexibility; Game theory;
Find related papers by JEL classification:
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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