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

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

Author Info

Ciaran Driver (Tanaka Business School, Imperial College, London)
Paul Temple (University of Surrey)
Giovanni Urga (Cass Business School, London)

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Paul Temple

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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Publisher Info
Paper provided by Department of Economics, University of Surrey in its series Department 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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Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-01-24 (All new papers)

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