The effects of irreversibility on the timing and intensity of lumpy investment
This paper examines how changes in irreversibility of investment affect the timing and intensity of lumpy investment. We develop a continuous-time model wherein a firm is endowed with a perpetual option to invest in a project at any time by incurring a partially reversible investment cost at that instant. The amount of the investment cost is directly related to the intensity of investment that is endogenously chosen by the firm at the instant when the investment option is exercised. We show that higher irreversibility of investment induces the firm to raise its optimal investment trigger, thereby deferring the undertaking of the project. Furthermore, we show that changes in irreversibility of investment have no impact on the firm's optimal investment intensity due to two opposing effects that exactly offset each other. Finally, we show that higher irreversibility of investment reduces the value of the investment option and, therefore, makes the firm less valuable.
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
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.:
- Shakill Hassan, 2005.
"Optimal timing of defections from price-setting cartels in volatile markets,"
03, Economic Research Southern Africa.
- Hassan, Shakill, 2006. "Optimal timing of defections from price-setting cartels in volatile markets," Economic Modelling, Elsevier, vol. 23(5), pages 792-804, September.
- Andrew B. Abel & Janice C. Eberly, 1995.
"The Effects of Irreversibility and Uncertainty on Capital Accumulation,"
NBER Working Papers
5363, National Bureau of Economic Research, Inc.
- Abel, Andrew B. & Eberly, Janice C., 1999. "The effects of irreversibility and uncertainty on capital accumulation," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 339-377, December.
- Andrew B. Abel & Janice B. Eberly, . "The Effects of Irreversibility and Uncertainty on Capital Accumulation," Rodney L. White Center for Financial Research Working Papers 21-95, Wharton School Rodney L. White Center for Financial Research.
- Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1995.
"Options, the Value of Capital, and Investment,"
NBER Working Papers
5227, National Bureau of Economic Research, Inc.
- 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.
- Abel, Andrew B., 1952-, 1995. "Options, the value of capital, and investment," Working papers 3843-95., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Andrew B. Abel & Janice C. Eberly, .
"A Unified Model of Investment Under Uncertainty,"
Rodney L. White Center for Financial Research Working Papers
14-93, Wharton School Rodney L. White Center for Financial Research.
- Goldstein, Robert & Ju, Nengjiu & Leland, Hayne, 2001. "An EBIT-Based Model of Dynamic Capital Structure," The Journal of Business, University of Chicago Press, vol. 74(4), pages 483-512, October.
- Wong, Kit Pong, 2009. "Progressive taxation, tax exemption, and corporate liquidation policy," Economic Modelling, Elsevier, vol. 26(2), pages 295-299, March.
- Leland, Hayne E, 1994.
" Corporate Debt Value, Bond Covenants, and Optimal Capital Structure,"
Journal of Finance,
American Finance Association, vol. 49(4), pages 1213-52, September.
- Hayne E. Leland., 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Research Program in Finance Working Papers RPF-233, University of California at Berkeley.
- Agliardi, Elettra & Agliardi, Rossella, 2008. "Progressive taxation and corporate liquidation policy," Economic Modelling, Elsevier, vol. 25(3), pages 532-541, May.
- Wong, Kit Pong, 2008. "Does market demand volatility facilitate collusion?," Economic Modelling, Elsevier, vol. 25(4), pages 696-703, July.
- Wong, Kit Pong, 2009. "The effects of abandonment options on operating leverage and investment timing," International Review of Economics & Finance, Elsevier, vol. 18(1), pages 162-171, January.
- Mark Shackleton & Rafal Wojakowski, 2002. "The Expected Return and Exercise Time of Merton-style Real Options," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(3&4), pages 541-555.
- Wong, Kit Pong, 2007. "The effect of uncertainty on investment timing in a real options model," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2152-2167, July.
- Bar-Ilan, Avner & Strange, William C., 1999. "The Timing and Intensity of Investment," Journal of Macroeconomics, Elsevier, vol. 21(1), pages 57-77, January.
- Capozza, Dennis & Li, Yuming, 1994. "The Intensity and Timing of Investment: The Case of Land," American Economic Review, American Economic Association, vol. 84(4), pages 889-904, September.
When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:27:y:2010:i:1:p:97-102. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.