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On the Investment-Uncertainty Relationship: A Game Theoretic Real Option Approach

  • Elmar Lukas

    ()

    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Andreas Welling

    ()

    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

Registered author(s):

    This paper examines the effect of uncertainty on investment timing in a game theoretical real option model. We extend the settings of Gryglewicz et al. (2008), Wong (2007), and Sarkar (2000) by a more general assumption, i.e. the investment is also influenced by the actions of a second player. The results show that a U-shaped investment-uncertainty relationship generally sustains. However, timing of an investment occurs inefficiently late. Moreover, we show that the influence of uncertainty on the associated first-mover advantage becomes ambiguous, too.

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    File URL: http://www.fww.ovgu.de/fww_media/femm/femm_2012/2012_30.pdf
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    Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 120030.

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    Length: 19 pages
    Date of creation: Nov 2012
    Date of revision:
    Handle: RePEc:mag:wpaper:120030
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    1. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
    2. Gryglewicz, Sebastian & Huisman, Kuno J.M. & Kort, Peter M., 2008. "Finite project life and uncertainty effects on investment," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2191-2213, July.
    3. Sarkar, Sudipto, 2000. "On the investment-uncertainty relationship in a real options model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 219-225, February.
    4. Cvitanic, Jaksa & Radas, Sonja & Sikic, Hrvoje, 2011. "Co-development ventures: Optimal time of entry and profit-sharing," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1710-1730, October.
    5. Dirk Hackbarth & Erwan Morellec, 2008. "Stock Returns in Mergers and Acquisitions," Journal of Finance, American Finance Association, vol. 63(3), pages 1213-1252, 06.
    6. Morellec, Erwan & Zhdanov, Alexei, 2005. "The dynamics of mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 77(3), pages 649-672, September.
    7. repec:dgr:kubcen:2006124 is not listed on IDEAS
    8. Lee, Tan, 2004. "Determinants of the foreign equity share of international joint ventures," Journal of Economic Dynamics and Control, Elsevier, vol. 28(11), pages 2261-2275, October.
    9. 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.
    10. Kort, Peter M. & Murto, Pauli & Pawlina, Grzegorz, 2010. "Uncertainty and stepwise investment," European Journal of Operational Research, Elsevier, vol. 202(1), pages 196-203, April.
    11. Diderik Lund, 2003. "How to analyze the investment–uncertainty relationship in real option models?," EPRU Working Paper Series 03-17, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    12. Lukas, Elmar & Welling, Andreas, 2012. "Negotiating M&As under uncertainty: The influence of managerial flexibility on the first-mover advantage," Finance Research Letters, Elsevier, vol. 9(1), pages 29-35.
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