Group-Managed Real Options

Lorenzo Garlappi, Ron Giammarino and Ali Lazrak

The Review of Financial Studies, 2022, vol. 35, issue 9, 4105-4151

Abstract: We study a standard real-option problem in which sequential decisions are made through voting by a group of members with heterogeneous beliefs. We show that, when facing both investment and abandonment timing decisions, the group behavior cannot be replicated by that of a representative “median” member. As a result, members’ disagreement generates inertia—the group delays investment relative to a single-agent case—and underinvestment—the group rejects projects that are supported by a majority of members, acting in autarky. These coordination frictions hold in groups of any size, for general voting protocols, and are exacerbated by belief polarization.

JEL-codes: D71 G31 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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