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Sunk costs, uncertainty and market exit: A real options perspective

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  • Jonathan O'Brien
  • Timothy Folta
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    Abstract

    In this article, we examine whether the option value of keeping an operation alive will deter firms from exiting an industry. We find that uncertainty dissuades firms from exiting an industry, but only when the sunk costs of entering and exiting that industry are sizeable. Moreover, we argue and find that sunk costs can be influenced by the technological intensity of an industry, by the extent to which a firm competes on the basis of innovation, and by the firm's diversification strategy. Copyright 2009 The Author 2009. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved., Oxford University Press.

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    Bibliographic Info

    Article provided by Oxford University Press in its journal Industrial and Corporate Change.

    Volume (Year): 18 (2009)
    Issue (Month): 5 (October)
    Pages: 807-833

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    Handle: RePEc:oup:indcch:v:18:y:2009:i:5:p:807-833

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    Cited by:
    1. Sandri, Serena & Schade, Christian & Mußhoff, Oliver & Odening, Martin, 2010. "Holding on for too long? An experimental study on inertia in entrepreneurs' and non-entrepreneurs' disinvestment choices," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 76(1), pages 30-44, October.
    2. Pierre Blanchard & Jean-Pierre Huiban & Claude Mathieu, 2012. "The determinants of firm exit in the French food industries," Review of Agricultural and Environmental Studies - Revue d'Etudes en Agriculture et Environnement, INRA Department of Economics, INRA Department of Economics, vol. 93(2), pages 193-212.
    3. Simone Pieralli & Silke Hüttel & Martin Odening, 2013. "A model of firm exit under inefficiency and uncertainty," EcoMod2013, EcoMod 5236, EcoMod.
    4. Sangcheol Song, 2014. "Entry mode irreversibility, host market uncertainty, and foreign subsidiary exits," Asia Pacific Journal of Management, Springer, Springer, vol. 31(2), pages 455-471, June.

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