Contrasts between classes of assets in fixed investment panel equations as a way of testing real option theory
Ciaran Driver (),
Katsushi S. Imai (),
Paul Temple and
Giovanni Urga ()
Additional contact information Ciaran Driver: Imperial College Management School, Postal: The Management School, Imperial College, 53 Princes Gate, London SW7 2PG (U.K.)
This paper reports estimation of investment equations for two classes of fixed assets: plant & machinery and building for a large sample of UK manufacturing industries. It exploits the different degree of irreversibility that characterises these assets to test the power of real options theory to explain investment under uncertainty. Additionally, the paper uses a specially constructed industry-specific measure of irreversibility for plant and machinery investment to test for real options effects within that class of investment.