We analyze a duopoly real-option entry game where the second mover has a cost advantage over the first mover. The equilibrium solution features five regions. In addition to the option-value-of-waiting and competing-to-enter (first-mover-advantage) regions (Fudenberg and Tirole, 1985; Grenadier,...

Textbooks on financial management have emphasized the shortcomings of the payback criterion for decades. However, empirical evidence suggests that in actual capital budgeting procedures the payback method is used quite regularly. Mostly, it is implemented supplementary to net present value or...

We study the effects of uncertainty on corporate leverage adjustments with respect to investment spikes and find that overlevered and underlevered firms behave very differently in response to the combination of uncertainty and investment spikes. Overlevered firms facing high uncertainty converge...

The levels of uncertainty surrounding construction projects are particularly high and construction managers should be aware that adequately managing the effects of the different types of uncertainty may lead to an increase in the overall performance of construction companies. The model proposed...

We apply utility indifference pricing to solve a contingent claim problem, valuing a connected pair of gas fields where the underlying process is not standard Geometric Brownian motion and the assumption of complete markets is not fulfilled. First, empirical data are often characterized by...

This paper presents a real options model to value the option to invest in a new project, whose value is contingent on two multiplicative stochastic factors behaving accordingly to correlated geometric Brownian motions. A general sensitivity analysis is conducted highlighting the importance of...

We apply utility indifference pricing to solve a contingent claim problem, valuing a connected pair of gas fields where the underlying process is not standard Geometric Brownian motion and the assumption of complete markets is not fulfilled. First, empirical data are often characterized by...

We view innovation investment as a real option and explore the implications of ambiguity (Knightian uncertainty) and risk for innovation decisions. Our analysis uses a risk measure and a new outcome-independent measure of ambiguity. We find a consistently significant negative effect of ambiguity...

This paper deals with capital budgeting decisions under uncertainty. We present an Aggregate Return On Investment (AROI), obtained as the ratio of total (undiscounted) cash flow to total invested capital and show that it is a genuine rate of return which, compared with the risk-adjusted cost of...

Real option valuation has traditionally been concerned with investment under project value uncertainty while assuming the agent has perfect confidence in a specific model. However, agents do not generally have perfect confidence in their model and this {\it ambiguity} affects their decisions....