Investment, irreversibility, and options: An empirical framework

Joseph Shaanan

Review of Financial Economics, 2005, vol. 14, issue 3-4, 241-254

Abstract: The paper presents an empirical test of the impact of irreversibility on threshold return levels and on investment. These tests permit an examination of a key concept and some predictions of irreversible investment theory, which links the option pricing approach with Tobin's q theory. A key feature of the paper is that estimates of the threshold return levels required for investment, which account for both options to invest and disinvest, are obtained internally from the empirical model. The study employs a panel data set consisting of U.S. manufacturing firms and finds that irreversibility, through its negative impact on marginal put options and the resulting increase in threshold returns, reduces investment in two of the four groups of firms studied.

Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1016/j.rfe.2004.11.001

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:revfec:v:14:y:2005:i:3-4:p:241-254

Access Statistics for this article

More articles in Review of Financial Economics from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().