Corporate investment decisions with switch flexibility, constraints, and path-dependency

Spiros H. Martzoukos (), Nayia Pospori () and Lenos Trigeorgis ()
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Spiros H. Martzoukos: University of Cyprus
Nayia Pospori: Ministry of Economics
Lenos Trigeorgis: Durham University Business School

Review of Quantitative Finance and Accounting, 2024, vol. 62, issue 3, No 11, 1223-1250

Abstract: Abstract We model sequential, corporate investment decisions with time-to-build delays, operating scale mode switching, operating constraints, and path dependencies. We also account for stochastic salvage (abandonment) values that are utilization (path) dependent. Our results highlight a key link between economic depreciation, stochastic salvage values and operational flexibility with asymmetric switching costs. We further identify conditions uncovering a non-conventional impact of resulting path-dependencies on the investment-uncertainty relationship: higher uncertainty and lower asset return shortfall (“dividend yield”) may expedite, rather than delay, corporate investment. High switching costs, operating constraints, and economic depreciation may reduce or eliminate these non-conventional effects.

Keywords: Real options; Multistage decisions; Operating and production flexibility; Stochastic salvage; Switching costs (search for similar items in EconPapers)
JEL-codes: D81 G31 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11156-023-01234-4

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