The Effects of Abandonment Options on Investment Timing and Intensity

Wong, Kit Pong

doi:10.1111/j.1467-8586.2011.00399.x

Cited by 7 publications

(3 citation statements)

References 23 publications

(25 reference statements)

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“…Irrespective of whether the investment is completely irreversible (

s = 0

) or completely reversible (

s = 1

), the firm produces the same quantity at per unit of time. This is similar to Wong () where the optimal quantity (intensity) is the same irrespective of whether the abandonment option is present. Second, for

s \in (s^{λ}, 1)

, with

(1 - η) / (1 - s η) \in (0, 1)

, it follows from that

\frac{β}{β - 1} < \frac{q^{λ} I^{'} false(q^{λ} false)}{I (q^{λ})} + \frac{1}{β - 1} \frac{υ_{2}^{λ} q^{λ} K}{I (q^{λ})}, s \in false(s^{λ}, 1 false) .

Then, using the assumption that

{qI}^{'} false(q false) / I false(q false) + 1 / false(β - 1 false) υ_{2} qK / I false(q false)

is increasing with q , implies that the optimal quantity

q^{λ}

for

s \in (s^{λ}, 1)

is larger than that for

s \in false[0, s^{λ} false] \cup false{1 false}

.…”

Section: Model Solutionsupporting

confidence: 70%

“…Irrespective of whether the investment is completely irreversible (s = 0) or completely reversible (s = 1), the firm produces the same quantity at per unit of time. This is similar to Wong (2011) where the optimal quantity (intensity) is the same irrespective of whether the abandonment option is present. Second, for s ∈ (s λ , 1), with…”

Section: Model Solutionmentioning

confidence: 59%

See 1 more Smart Citation

Random Shock Uncertainty and Investment Reversibility: Real Option Framework

Cui

Sawada

2017

Bulletin of Econ Res

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This paper examines, in the presence of random shock, how changes in reversibility of investment affect a firm's optimal investment strategies including the investment timing (trigger) and quantity. Existing results do not consider random shock, where the quantity is independent of the degree of reversibility and the investment trigger is always decreasing with the degree of reversibility. In contrast, we show that with random shock, the quantity exhibits an inverse U‐shape, and the investment trigger is not always monotonically decreasing with the degree of reversibility. Additionally, we show that the firm undertakes a smaller quantity with random shock than without random shock for any degree of reversibility. Finally, we find that the presence of random shock decreases firm value, which implies that random shock is costly for firms.

show abstract

“…Irrespective of whether the investment is completely irreversible (

s = 0

) or completely reversible (

s = 1

s \in (s^{λ}, 1)

, with

(1 - η) / (1 - s η) \in (0, 1)

, it follows from that

\frac{β}{β - 1} < \frac{q^{λ} I^{'} false(q^{λ} false)}{I (q^{λ})} + \frac{1}{β - 1} \frac{υ_{2}^{λ} q^{λ} K}{I (q^{λ})}, s \in false(s^{λ}, 1 false) .

Then, using the assumption that

{qI}^{'} false(q false) / I false(q false) + 1 / false(β - 1 false) υ_{2} qK / I false(q false)

is increasing with q , implies that the optimal quantity

q^{λ}

for

s \in (s^{λ}, 1)

is larger than that for

s \in false[0, s^{λ} false] \cup false{1 false}

.…”

Section: Model Solutionsupporting

confidence: 70%

Section: Model Solutionmentioning

confidence: 59%

Random Shock Uncertainty and Investment Reversibility: Real Option Framework

Cui

Sawada

2017

Bulletin of Econ Res

View full text Add to dashboard Cite

show abstract

“…Mauer and Ott (1995) include salvage value in a productive asset replacement model, while Dobbs (2004) deduces its value from the operating cost threshold. By considering alternative ordered forms of flexibility including abandonment, Keswani and Shackleton (2006) show the significance of the abandonment option in reducing the investment timing trigger thereby prompting earlier exercise, a finding endorsed by Wong (2012).…”

Section: The Effects Of An Uncertain Abandonment Value On the Investmmentioning

confidence: 94%