This article statistically tests the option theory of irreversible investment. Using contingent claims valuation, we derive the value of options to invest in capacity, where the projects are endogenous to the economic circumstances prevailing at the investment date. We then test whether decisions made by Canadian copper mines are compatible with the trigger price implied by the theory. Our model explains investment size and timing satisfactorily from a statistical and an economic point of view; simulations with a mean‐reverting process suggest that the results do not depend crucially on the assumption that price follows a geometric Brownian motion.
Some of the recent “hype” about how advances in technology are forging a “new economy” has evaporated. Interest in “dot.com” start-up companies in the US has waned with the decline in stock market valuations. Some of the more extravagant claims – in particular, that the “new economy” would see the end to recessions – have been tempered by the recent slowdown in the US economy.
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