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Time preference and real investment

Author

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  • Choi, Kyoung Jin
  • Kwak, Minsuk
  • Shim, Gyoocheol

Abstract

This paper studies the investment timing problem of an entrepreneur with a non-tradable real option with undiversifiable risk. We find that the time preference can have a significant impact on the risk attitude toward the idiosyncratic risk, which results from the wealth effect on the implied option value. If the agent is impatient (patient), an increase in idiosyncratic volatility increases (decreases) the agent’s value and delays (hastens) investment. This finding suggests several important implications and empirical predictions for investment decisions in private firms and public firms with concentrated ownership.

Suggested Citation

  • Choi, Kyoung Jin & Kwak, Minsuk & Shim, Gyoocheol, 2017. "Time preference and real investment," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 18-33.
  • Handle: RePEc:eee:dyncon:v:83:y:2017:i:c:p:18-33
    DOI: 10.1016/j.jedc.2017.07.010
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    References listed on IDEAS

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    Cited by:

    1. Carol Alexander & Xi Chen, 2018. "Model Risk in Real Option Valuation," Papers 1809.00817, arXiv.org, revised Sep 2018.
    2. Carol Alexander & Xi Chen, 0. "Model risk in real option valuation," Annals of Operations Research, Springer, vol. 0, pages 1-32.

    More about this item

    Keywords

    Time preference; Risk attitude; Wealth effect; Real option; Idiosyncratic risk;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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