An Empirical Examination of the Relationship Between Real Options Values and the Rate of Investment

Calum Turvey, Andrew A. Toole and Jaclyn D. Kropp

No 6606, 2007 1st Forum, February 15-17, 2007, Innsbruck, Austria from International European Forum on System Dynamics and Innovation in Food Networks

Abstract: This paper examines the relationship between uncertainty and investment decisions by food and non-food firms. Using hysteresis and the real options paradigm, we review why uncertainty might cause firms to delay investment. In particular, our model looks for a negative relationship between capital invested and uncertainty. In the alternative, if the relationship is positive, this may be consistent with the exercise of growth options or competitive markets. Empirical results are mixed. In one of the four models we present there is clear evidence of hysteresis, that is a negative relationship between year over year investment and uncertainty. The remaining 3 models indicate the opposite, a positive relationship between investment and risk. Although the models differ, the first model is the stronger of the three. Nonetheless, the results are ambiguous. Although we use a large cross sectional, time series panel set of data, we find nothing remarkable about the food industry per se, except that across industries, their level of investment is about in the middle.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 17
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:ags:iefi07:6606

DOI: 10.22004/ag.econ.6606

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