On the investment–uncertainty relationship: A game theoretic real option approach |
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Institution: | 1. Department of Financial Engineering, Hunan University, Changsha, China;2. School of Mathematics, Statistics and Actuarial Science, University of Kent, UK |
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Abstract: | This paper examines the effect of uncertainty on investment timing in a game theoretic real option model. We extend the settings of the related recent literature on investment timing under uncertainty by a more general assumption, i.e. the investment is also influenced by the actions of a second player. The results show that a U-shaped investment–uncertainty relationship generally sustains even for infinite-lived investment projects and proper defined cash flows. However, timing of an investment occurs inefficiently late. Moreover, we show that the influence of uncertainty on the associated first-mover advantage becomes ambiguous, too. |
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Keywords: | Real option Investment Uncertainty Managerial flexibility Game theory |
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