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Sunk costs, uncertainty and market exit: A real options perspective

Author

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  • Jonathan O'Brien
  • Timothy Folta

Abstract

In this article, we examine whether the option value of keeping an operation alive will deter firms from exiting an industry. We find that uncertainty dissuades firms from exiting an industry, but only when the sunk costs of entering and exiting that industry are sizeable. Moreover, we argue and find that sunk costs can be influenced by the technological intensity of an industry, by the extent to which a firm competes on the basis of innovation, and by the firm's diversification strategy. Copyright 2009 The Author 2009. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved., Oxford University Press.

Suggested Citation

  • Jonathan O'Brien & Timothy Folta, 2009. "Sunk costs, uncertainty and market exit: A real options perspective," Industrial and Corporate Change, Oxford University Press, vol. 18(5), pages 807-833, October.
  • Handle: RePEc:oup:indcch:v:18:y:2009:i:5:p:807-833
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    File URL: http://hdl.handle.net/10.1093/icc/dtp014
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    1. repec:eee:iburev:v:26:y:2017:i:6:p:1088-1099 is not listed on IDEAS
    2. Pieralli, Simone & Hüttel, Silke & Odening, Martin, 2013. "A model of firm exit under inefficiency and uncertainty," Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers 155700, Humboldt University Berlin, Department of Agricultural Economics.
    3. repec:spr:manint:v:57:y:2017:i:4:d:10.1007_s11575-017-0317-z is not listed on IDEAS
    4. Song, Sangcheol & Lee, Seung-Hyun & Makhija, Mona, 2015. "Operational hedging in foreign direct investments under volatile and divergent exchange rates across countries," Journal of World Business, Elsevier, vol. 50(3), pages 548-557.
    5. Blanchard, Pierre, 2012. "The determinants of firm exit in the French food industries," Revue d'Etudes en Agriculture et Environnement, Editions NecPlus, vol. 93(02), pages 193-212, June.
    6. repec:spr:manint:v:54:y:2014:i:1:d:10.1007_s11575-013-0198-8 is not listed on IDEAS
    7. Pieralli, Simone & Hüttel, Silke & Odening, Martin, 2014. "Abandonment of milk production under uncertainty and inefficiency: The case of West German farms," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170236, Agricultural and Applied Economics Association.
    8. Chignell, Simon & Gross, Robert J.K., 2013. "Not locked-in? The overlooked impact of new gas-fired generation investment on long-term decarbonisation in the UK," Energy Policy, Elsevier, vol. 52(C), pages 699-705.
    9. Sangcheol Song, 2014. "Entry mode irreversibility, host market uncertainty, and foreign subsidiary exits," Asia Pacific Journal of Management, Springer, vol. 31(2), pages 455-471, June.
    10. repec:spr:manint:v:53:y:2013:i:4:d:10.1007_s11575-012-0157-9 is not listed on IDEAS
    11. Song, Sangcheol, 2014. "Unfavorable Market Conditions, Institutional and Financial Development, and Exits of Foreign Subsidiaries," Journal of International Management, Elsevier, vol. 20(3), pages 279-289.
    12. Sandri, Serena & Schade, Christian & Mußhoff, Oliver & Odening, Martin, 2010. "Holding on for too long? An experimental study on inertia in entrepreneurs' and non-entrepreneurs' disinvestment choices," Journal of Economic Behavior & Organization, Elsevier, vol. 76(1), pages 30-44, October.
    13. Pierre Blanchard & Emmanuel Dhyne & Catherine Fuss & Claude Mathieu, 2016. "(Not So) Easy Come, (Still) Easy Go? Footloose Multinationals Revisited," The World Economy, Wiley Blackwell, vol. 39(5), pages 679-707, May.
    14. Esposito De Falco Salvatore & Renzi Antonio, 2015. "The Role of Sunk Cost and Slack Resources in Innovation: A Conceptual Reading in an Entrepreneurial Perspective," Entrepreneurship Research Journal, De Gruyter, vol. 5(3), pages 167-179, July.

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