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Competition and the Bad News Principle in a Real Options Framework

  • Katsumasa Nishide

    ()

    (Department of Economics, Yokohama National University)

  • Kyoko Yagi

    ()

    (Department of Management Science and Engineering, Akita Prefectural University)

We study the investment timing problem where two firms that compete for investment preemption know in advance the time at which the economic condition changes. We show that the so-called Bad News Principle applies to the leader firm’s investment decision near maturity in many cases. This result indicates that the option value to wait does have an impact even in a competitive situation, which is in contrast to the previous literature.

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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP860.pdf
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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 860.

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Date of creation: Apr 2013
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Handle: RePEc:kyo:wpaper:860
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  1. Makoto Goto & Katsumasa Nishide & Ryuta Takashima, 2013. "Irreversible Investment under Competition with a Markov Switching Regime," KIER Working Papers 861, Kyoto University, Institute of Economic Research.
  2. Perotti, Roberto & Alesina, Alberto, 1996. "Income Distribution, Political Instability, and Investment," Scholarly Articles 4553018, Harvard University Department of Economics.
  3. Weeds, Helen, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 729-47, July.
  4. Nielsen, Martin J., 2002. "Competition and irreversible investments," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 731-743, May.
  5. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
  6. Joaquin, Domingo Castelo & Khanna, Naveen, 2001. "Investment timing decisions under threat of potential competition: Why firm size matters1," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(1), pages 1-17.
  7. Nishide, Katsumasa & Nomi, Ernesto Kazuhiro, 2009. "Regime uncertainty and optimal investment timing," Journal of Economic Dynamics and Control, Elsevier, vol. 33(10), pages 1796-1807, October.
  8. Alberto Alesina & Roberto Perotti, 1993. "Income Distribution, Political Instability, and Investment," NBER Working Papers 4486, National Bureau of Economic Research, Inc.
  9. Knack, Stephen & Keefer, Philip, 1995. "Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Indicators," MPRA Paper 23118, University Library of Munich, Germany.
  10. Steven R. Grenadier, 2002. "Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 691-721.
  11. Robert Lensink, 2002. "Is the uncertainty-investment link non-linear? Empirical evidence for developed economies," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 138(1), pages 131-147, March.
  12. Bouis, R. & Huisman, K.J.M. & Kort, P.M., 2006. "Investment in Oligopoly under Uncertainty : The Accordion Effect," Discussion Paper 2006-69, Tilburg University, Center for Economic Research.
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