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Real Options - Delay vs. Pre-Emption: Do Industrial Characteristics Matter?

Driver, Ciaran and Temple, Paul and Urga, Giovanni (2008) 'Real Options - Delay vs. Pre-Emption: Do Industrial Characteristics Matter?' International Journal of Industrial Organization, 26 . pp. 532-545.

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Abstract

This paper presents an empirical study of the channels of influence from uncertainty to fixed investment suggested by real options theory. Using panel data from the Confederation of British Industry (CBI) Industrial Trends Survey, we report OLS estimates of the impact of uncertainty on investment where the regressors are augmented by cross-sectional averages of the dependent variable and of the individual specific regressors, as recently suggested by Pesaran [Pesaran, M.H., 2006. Estimation and Inference in large heterogeneous panels with a multifactor error structure. Econometrica 74, 967-1012]. The cross-industry pattern of results is checked for consistency with the pattern predicted by real options theory, using a specially constructed data set of industrial characteristics. We find that irreversibility is able to predict the pattern detected, but only when combined with a measure of the information advantage of delay. There is also evidence for expansion options effects; industries with high R&D and advertising intensities tend to have positive uncertainty effects.

Item Type: Articles
SOAS Departments & Centres: Faculty of Law and Social Sciences > Department of Financial and Management Studies
DOI (Digital Object Identifier): 10.1016/j.ijindorg.2007.03.003
Depositing User: Mutsa Marau
Date Deposited: 22 Oct 2010 10:32
URI: http://eprints.soas.ac.uk/id/eprint/10510

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