Real Option Exercise Empirical Evidence

We study when and why firms exercise real options. Using detailed project-level investment data, we find that the likelihood that a firm exercises a real option is strongly related to peer exercise behavior. Peer exercise decisions are as important in explaining exercise behavior as variables common...

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Bibliographic Details
Published inThe Review of financial studies Vol. 33; no. 7; pp. 3250 - 3306
Main Authors Décaire, Paul H., Gilje, Erik P., Taillard, Jérôme P.
Format Journal Article
LanguageEnglish
Published Oxford University Press 01.07.2020
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Summary:We study when and why firms exercise real options. Using detailed project-level investment data, we find that the likelihood that a firm exercises a real option is strongly related to peer exercise behavior. Peer exercise decisions are as important in explaining exercise behavior as variables commonly associated with standard real option theories, such as volatility. We identify peer effects using localized exogenous variation in peer project exercise decisions and find evidence consistent with information externalities being important for exercise behavior.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhz092