On the Investment-Uncertainty Relationship: A Game Theoretic Real Option Approach
AbstractThis paper examines the effect of uncertainty on investment timing in a game theoretical real option model. We extend the settings of Gryglewicz et al. (2008), Wong (2007), and Sarkar (2000) 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. 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 120030.
Length: 19 pages
Date of creation: Nov 2012
Date of revision:
Contact details of provider:
Postal: Universitätsplatz 2, Gebäude W und I, 39106 Magdeburg
Phone: (0391) 67-18 584
Fax: (0391) 67-12 120
Web page: http://www.ww.uni-magdeburg.de
More information through EDIRC
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
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Wong, Kit Pong, 2007. "The effect of uncertainty on investment timing in a real options model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(7), pages 2152-2167, July.
- Lukas, Elmar & Welling, Andreas, 2012. "Negotiating M&As under uncertainty: The influence of managerial flexibility on the first-mover advantage," Finance Research Letters, Elsevier, Elsevier, vol. 9(1), pages 29-35.
- Diderik Lund, 2003.
"How to analyze the investment–uncertainty relationship in real option models?,"
EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics
03-17, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
- Lund, Diderik, 2005. "How to analyze the investment-uncertainty relationship in real option models?," Review of Financial Economics, Elsevier, Elsevier, vol. 14(3-4), pages 311-322.
- Dirk Hackbarth & Erwan Morellec, 2006.
"Stock Returns in Mergers and Acquisitions,"
Swiss Finance Institute Research Paper Series, Swiss Finance Institute
06-01, Swiss Finance Institute.
- Kort, Peter M. & Murto, Pauli & Pawlina, Grzegorz, 2010. "Uncertainty and stepwise investment," European Journal of Operational Research, Elsevier, Elsevier, vol. 202(1), pages 196-203, April.
- Gryglewicz, S. & Huisman, K.J.M. & Kort, P.M., 2006.
"Finite Project Life and Uncertainty Effects on Investment,"
Discussion Paper, Tilburg University, Center for Economic Research
2006-124, Tilburg University, Center for Economic Research.
- Gryglewicz, Sebastian & Huisman, Kuno J.M. & Kort, Peter M., 2008. "Finite project life and uncertainty effects on investment," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 32(7), pages 2191-2213, July.
- Morellec, Erwan & Zhdanov, Alexei, 2005. "The dynamics of mergers and acquisitions," Journal of Financial Economics, Elsevier, Elsevier, vol. 77(3), pages 649-672, September.
- Sarkar, Sudipto, 2000. "On the investment-uncertainty relationship in a real options model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 24(2), pages 219-225, February.
- Cvitanic, Jaksa & Radas, Sonja & Sikic, Hrvoje, 2011. "Co-development ventures: Optimal time of entry and profit-sharing," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 35(10), pages 1710-1730, October.
- Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
- Lee, Tan, 2004. "Determinants of the foreign equity share of international joint ventures," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(11), pages 2261-2275, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guido Henkel).
If references are entirely missing, you can add them using this form.