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Corporate investment decisions with switch flexibility, constraints, and path-dependency

Author

Listed:
  • Spiros H. Martzoukos

    (University of Cyprus)

  • Nayia Pospori

    (Ministry of Economics)

  • Lenos Trigeorgis

    (Durham University Business School)

Abstract

We model sequential, corporate investment decisions with time-to-build delays, operating scale mode switching, operating constraints, and path dependencies. We also account for stochastic salvage (abandonment) values that are utilization (path) dependent. Our results highlight a key link between economic depreciation, stochastic salvage values and operational flexibility with asymmetric switching costs. We further identify conditions uncovering a non-conventional impact of resulting path-dependencies on the investment-uncertainty relationship: higher uncertainty and lower asset return shortfall (“dividend yield”) may expedite, rather than delay, corporate investment. High switching costs, operating constraints, and economic depreciation may reduce or eliminate these non-conventional effects.

Suggested Citation

  • Spiros H. Martzoukos & Nayia Pospori & Lenos Trigeorgis, 2024. "Corporate investment decisions with switch flexibility, constraints, and path-dependency," Review of Quantitative Finance and Accounting, Springer, vol. 62(3), pages 1223-1250, April.
  • Handle: RePEc:kap:rqfnac:v:62:y:2024:i:3:d:10.1007_s11156-023-01234-4
    DOI: 10.1007/s11156-023-01234-4
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    More about this item

    Keywords

    Real options; Multistage decisions; Operating and production flexibility; Stochastic salvage; Switching costs;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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