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Group-Managed Real Options

Author

Listed:
  • Lorenzo Garlappi
  • Ron Giammarino
  • Ali Lazrak

Abstract

We study a standard real-option problem in which sequential decisions are made through voting by a group of members with heterogeneous beliefs. We show that, when facing both investment and abandonment timing decisions, the group behavior cannot be replicated by that of a representative “median” member. As a result, members’ disagreement generates inertia—the group delays investment relative to a single-agent case—and underinvestment—the group rejects projects that are supported by a majority of members, acting in autarky. These coordination frictions hold in groups of any size, for general voting protocols, and are exacerbated by belief polarization.

Suggested Citation

  • Lorenzo Garlappi & Ron Giammarino & Ali Lazrak, 2022. "Group-Managed Real Options," The Review of Financial Studies, Society for Financial Studies, vol. 35(9), pages 4105-4151.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:9:p:4105-4151.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab100
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    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations

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