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Contrasts Between Classes of Assets in Fixed Investment Equations as a Way of Testing Real Option Theory

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  • Ciaran Driver

    (Tanaka Business School, Imperial College, London)

  • Paul Temple

    (University of Surrey)

  • Giovanni Urga

    (Cass Business School, London)

Abstract

This paper tests the power of real options theory to explain investment under uncertainty, exploiting differences in the degree of irreversibility between machinery and buildings. It reports estimates of investment equations for each asset class using a large sample of UK manufacturing industries, with results that are consistent with the predictions of real options theory. Additionally, using a specially constructed industryspecific measure of irreversibility for machinery investment, the paper provides further confirmation of the empirical relevance of real options.

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File URL: http://www.fahs.surrey.ac.uk/economics/discussion_papers/2005/DP08-05.pdf
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Bibliographic Info

Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0805.

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Length: 35 pages
Date of creation: May 2005
Date of revision:
Handle: RePEc:sur:surrec:0805

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Postal: Guildford, Surrey GU2 5XH
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Fax: (01483) 259548
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Web page: http://www.surrey.ac.uk/economics/
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Keywords: Investment; Irreversibility; Real Options; Uncertainty; Panel Data;

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  2. Andrew B. Abel & Avinash K. Dixit & Janice B. Eberly & Robert S. Pindyck, . "Options, the Value of Capital, and Investment," Rodney L. White Center for Financial Research Working Papers 15-95, Wharton School Rodney L. White Center for Financial Research.
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  8. Smith, Jeremy & McAleer, Michael, 1995. "Alternative Procedures for Converting Qualitative Response Data to Quantitative Expectations: An Application to Australian Manufacturing," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(2), pages 165-85, April-Jun.
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  21. Chatelain, J.-B. & Teurlai, J.-C., 2001. "Pitfalls in Investment Euler Equations," Working papers 81, Banque de France.
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