Investment Under Uncertainty with Implementation Delay
نویسندگان
چکیده
One of the major characteristics of the capital budgeting process is the delay existing between the investment decision and its implementation. This paper analyses investment decisions under uncertainty with implementation delay in a unified analytical framework. We provide closed-form solutions relating the value of the investment opportunity and the optimal investment threshold to the size of the delay. We show that the implementation lag creates an embedded option for the investor: the option to abandon the project during this delay. We derive the value of this option for various exercise policies corresponding to different levels of freedom with respect to the abandonment of the project and analyse its effects on the investment policy of the firm. ∗ Gauthier is from Prudential Securities. Morellec is from the University of Rochester. Special thanks are addressed to Marc Chesney, Pascal François, Monique JeanblancPicqué, Marc Yor and two anonymous referees for helpful comments. The usual caveat applies. †Corresponding author. Postal: William E. Simon School of Business Administration, University of Rochester, Rochester, NY 14627. E-mail: [email protected].
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