IDEAS home Printed from https://ideas.repec.org/a/taf/eurjfi/v25y2019i2p116-138.html
   My bibliography  Save this article

The investment decision with technological and market uncertainties

Author

Listed:
  • Yunfeng Fan
  • Sudipto Sarkar
  • Chuanqian Zhang

Abstract

This paper examines how technological uncertainty affects current investment; specifically, what is the impact on a firm’s investment in an existing technology when an improved technology might arrive in the future. The firm can invest in the current technology and upgrade to the new technology after its arrival (sequential investing), or it can bypass the current technology and invest directly in the new technology (leapfrogging). The main result is that, in the presence of market risk, future technological uncertainty has a non-monotonic effect on investment, with the investment trigger being a U-shaped function of the expected speed of arrival of the new technology. In this U-shaped relationship, the investment trigger starts rising later if the new technology is more attractive and also when volatility and interest rate are high and growth rate low; thus, technological uncertainty is more likely to have a positive effect on investment under these conditions. Finally, we apply the model to the sequential versus leapfrog investment decision, and find that leapfrogging becomes more attractive relative to sequential investment when interest rate and new technology earnings enhancement are higher, and when market volatility, growth rate and new technology investment cost are lower.

Suggested Citation

  • Yunfeng Fan & Sudipto Sarkar & Chuanqian Zhang, 2019. "The investment decision with technological and market uncertainties," The European Journal of Finance, Taylor & Francis Journals, vol. 25(2), pages 116-138, January.
    • Handle: RePEc:taf:eurjfi:v:25:y:2019:i:2:p:116-138
    DOI: 10.1080/1351847X.2018.1486865
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/1351847X.2018.1486865
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/1351847X.2018.1486865?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.

    Citations

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


    Cited by:

    1. Biao Chen & Jinqiang Yang & Chuanqian Zhang, 2021. "Corporate investment and financing with uncertain growth opportunities," International Review of Finance, International Review of Finance Ltd., vol. 21(3), pages 821-842, September.
    2. Gan, Liu & Xia, Xin, 2022. "SME financing with a combination contract of investment and guarantee," Finance Research Letters, Elsevier, vol. 50(C).

    More about this item

    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:taf:eurjfi:v:25:y:2019:i:2:p:116-138. 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.

    We have no bibliographic references for this item. You can help adding them by using 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: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/REJF20 .

    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.