Time preference and real investment |
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| Institution: | 1. Haskayne School of Business, University of Calgary, 2500 University Drive N.W. Calgary, Alberta T2N 1N4, Canada;2. Department of Mathematics, Hankuk University of Foreign Studies, Yongin 449-791, Republic of Korea;3. Department of Financial Engineering, Ajou University, Suwon 443-749, Republic of Korea;1. Erasmus School of Economics and Tinbergen Institute, Erasmus University, Rotterdam DR 3000, The Netherlands;2. Research Institute of Industrial Economics, Box 5565, Stockholm SE-102 15, Sweden |
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| Abstract: | This paper studies the investment timing problem of an entrepreneur with a non-tradable real option with undiversifiable risk. We find that the time preference can have a significant impact on the risk attitude toward the idiosyncratic risk, which results from the wealth effect on the implied option value. If the agent is impatient (patient), an increase in idiosyncratic volatility increases (decreases) the agent’s value and delays (hastens) investment. This finding suggests several important implications and empirical predictions for investment decisions in private firms and public firms with concentrated ownership. |
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