Regime uncertainty and optimal investment timing |
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Authors: | Katsumasa Nishide Ernesto Kazuhiro Nomi |
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Institution: | aInterdisciplinary Research Center, Yokohama National University, 79-3 Tokiwadai, Hodogaya-ku, Yokohama 240-8501, Japan;bMitsubishi Corporation do Brasil S.A., Brazil |
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Abstract: | We construct a real options model in which a regime change is expected at a pre-determined future time and study the effects of regime uncertainty on a firm's strategic investment decision, taking into consideration the remaining time to the regime change and the probability of each regime state. We show that just before the time of a regime change, firms should act as if the worst-case scenario was about to happen, even if a good state is highly possible. |
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Keywords: | Investment timing Real options Policy change Regime uncertainty |
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