IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v11y2014i1p25-35.html
   My bibliography  Save this article

On the investment–uncertainty relationship: A game theoretic real option approach

Author

Listed:
  • Lukas, Elmar
  • Welling, Andreas

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.

Suggested Citation

  • Lukas, Elmar & Welling, Andreas, 2014. "On the investment–uncertainty relationship: A game theoretic real option approach," Finance Research Letters, Elsevier, vol. 11(1), pages 25-35.
    • Handle: RePEc:eee:finlet:v:11:y:2014:i:1:p:25-35
    DOI: 10.1016/j.frl.2013.07.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S154461231300038X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2013.07.006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lukas, Elmar & Welling, Andreas, 2012. "Negotiating M&As under uncertainty: The influence of managerial flexibility on the first-mover advantage," Finance Research Letters, Elsevier, vol. 9(1), pages 29-35.
    2. Hackbarth, Dirk & Miao, Jianjun, 2012. "The dynamics of mergers and acquisitions in oligopolistic industries," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 585-609.
    3. Morellec, Erwan & Zhdanov, Alexei, 2005. "The dynamics of mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 77(3), pages 649-672, September.
    4. Gryglewicz, Sebastian & Huisman, Kuno J.M. & Kort, Peter M., 2008. "Finite project life and uncertainty effects on investment," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2191-2213, July.
    5. Lund, Diderik, 2005. "How to analyze the investment-uncertainty relationship in real option models?," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 311-322.
    6. Kort, Peter M. & Murto, Pauli & Pawlina, Grzegorz, 2010. "Uncertainty and stepwise investment," European Journal of Operational Research, Elsevier, vol. 202(1), pages 196-203, April.
    7. Dirk Hackbarth & Erwan Morellec, 2008. "Stock Returns in Mergers and Acquisitions," Journal of Finance, American Finance Association, vol. 63(3), pages 1213-1252, June.
    8. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    9. Wong, Kit Pong, 2007. "The effect of uncertainty on investment timing in a real options model," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2152-2167, July.
    10. Sarkar, Sudipto, 2000. "On the investment-uncertainty relationship in a real options model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 219-225, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Liu, Yu-Hong & Jiang, I-Ming, 2019. "Optimal proportion decision-making for two stages investment," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 776-785.
    2. Lukas, Elmar & Thiergart, Sascha, 2019. "The interaction of debt financing, cash grants and the optimal investment policy under uncertainty," European Journal of Operational Research, Elsevier, vol. 276(1), pages 284-299.
    3. Cole, John A. & Cadogan, Godfrey, 2014. "Bankruptcy risk induced by career concerns of regulators," Finance Research Letters, Elsevier, vol. 11(3), pages 259-271.
    4. Andreas Welling, 2017. "Optimal Carbon Tax Scheme under Uncertainty in an Oligopolistic Market of Polluters," FEMM Working Papers 170001, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    5. Chen, Zhuming & Luo, Xue, 2024. "Optimal investment and exit decision of venture capitals with multiple heterogeneous Beliefs," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 1138-1153.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Elmar Lukas & Andreas Welling, 2012. "On the Investment-Uncertainty Relationship: A Game Theoretic Real Option Approach," FEMM Working Papers 120030, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    2. Lukas, Elmar & Thiergart, Sascha, 2019. "The interaction of debt financing, cash grants and the optimal investment policy under uncertainty," European Journal of Operational Research, Elsevier, vol. 276(1), pages 284-299.
    3. Fouilloux, Jessica & Moraux, Franck & Viviani, Jean-Laurent, 2015. "Investing in finite-life carbon emissions reduction program under risk and idiosyncratic uncertainty," Energy Policy, Elsevier, vol. 82(C), pages 310-320.
    4. Whalley, A. Elizabeth, 2011. "Optimal R&D investment for a risk-averse entrepreneur," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 413-429, April.
    5. Lukas, Elmar & Welling, Andreas, 2017. "Efficient non-cooperative bargaining despite keeping strategic information private," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 287-294.
    6. Pablo Moran, 2017. "Information Revelation in Merger Waves," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 6(2), pages 174-233.
    7. Tarsalewska, Monika, 2015. "The timing of mergers along the production chain, capital structure, and risk dynamics," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 51-64.
    8. Gryglewicz, Sebastian & Huisman, Kuno J.M. & Kort, Peter M., 2008. "Finite project life and uncertainty effects on investment," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2191-2213, July.
    9. Lukas, Elmar & Reuer, Jeffrey J. & Welling, Andreas, 2012. "Earnouts in mergers and acquisitions: A game-theoretic option pricing approach," European Journal of Operational Research, Elsevier, vol. 223(1), pages 256-263.
    10. Strebulaev, Ilya A. & Whited, Toni M., 2012. "Dynamic Models and Structural Estimation in Corporate Finance," Foundations and Trends(R) in Finance, now publishers, vol. 6(1–2), pages 1-163, November.
    11. Lukas, Elmar & Pereira, Paulo J. & Rodrigues, Artur, 2019. "Designing optimal M&A strategies under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 1-20.
    12. Guthrie, Graeme, 2012. "Uncertainty and the trade-off between scale and flexibility in investment," Journal of Economic Dynamics and Control, Elsevier, vol. 36(11), pages 1718-1728.
    13. Sebastian Maier, 2021. "Re-evaluating natural resource investments under uncertainty: An alternative to limited traditional approaches," Annals of Operations Research, Springer, vol. 299(1), pages 907-937, April.
    14. Bernard Njindan Iyke & Sin-Yu Ho, 2020. "The effects of transitory and permanent inflation uncertainty on investment in Ghana," Economic Change and Restructuring, Springer, vol. 53(1), pages 195-217, February.
    15. Tarsalewska, Monika, 2018. "Buyouts under the threat of preemption," Journal of Banking & Finance, Elsevier, vol. 89(C), pages 39-58.
    16. Chi Man Leung & Yue Kuen Kwok, 2018. "Real options signaling game models for dynamic acquisition under information asymmetry," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 41(1), pages 35-63, May.
    17. Agliardi, Elettra & Amel-Zadeh, Amir & Koussis, Nicos, 2016. "Leverage changes and growth options in mergers and acquisitions," Journal of Empirical Finance, Elsevier, vol. 37(C), pages 37-58.
    18. Wong, Kit Pong, 2009. "The effects of abandonment options on operating leverage and investment timing," International Review of Economics & Finance, Elsevier, vol. 18(1), pages 162-171, January.
    19. Jolita Adamonis & Matthias Göcke, 2019. "Modelling economic hysteresis losses caused by sunk adjustment costs," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 42(2), pages 299-318, April.
    20. Dirk Hackbarth & Jianjun Miao, "undated". "The Timing and Returns of Mergers and Acquisitions in Oligopolistic Industries," Boston University - Department of Economics - Working Papers Series wp2008-022, Boston University - Department of Economics.

    More about this item

    Keywords

    Real option; Investment; Uncertainty; Managerial flexibility; Game theory;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:11:y:2014:i:1:p:25-35. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.