The participation of private capital in public infrastructure investment projects has been sought by many governments who perceive this as a way to overcome budgetary constraints and foster economic growth. For some types of projects, this investment may require government participation in the form of project guarantees in order to reduce the risk to the private investor, and as a consequence, ...

This study examines the link between disclosure, cash flow uncertainty, and the option value of equity. Building upon Merton (1974), I model the equity of a levered firm as a call option whose equilibrium value is increasing in the variance of future cash flows. Modeling levered equity as an option allows for calculation of the firm’s vega, where vega measures the sensitivity of equity value to...

In this paper we analyse the impact of policy uncertainty on foreign direct investment strategies. The paper follows the real options approach, which allows to investigate the value to a firm of waiting to invest and/or disinvest, when payoffs are stochastic due to political uncertainty and investments are partially reversible. Across the board we find that political uncertainty can be very det...

W a firm allows the return of previously purchased merchandise, it provides customers with an option that has measurable value. Whereas the option to return merchandise leads to an increase in gross revenue, it also creates additional costs. Selecting an optimal return policy requires balancing both demand and cost implications. In this paper, we develop a structural model of a consumer’s decis...

Since the pioneering work of Gary Becker and Jacob Mincer, the application of investment theory to the study of individuals’ education decisions has become commonplace. People are assumed to weigh short-term costs against future benefits and choose the schooling level that maximizes welfare. This static framework abstracts from uncertainty and suggests that few people should drop out if the mar...

In this paper we are concerned with modelling techniques for evaluating development and conservation opportunities when dealing with investment decisions involving environmental resources management. In this context, highly characterized by both environmental and economic uncertainty, we emphasize the importance of capturing the flexibility of different investment strategies. In particular, we ...

The value of a college degree is often quantified as the difference in earnings between those with and without a degree. The research presented here operationalizes this idea in two important ways. First, since future income and tuition are uncertain, a contingent claims model is developed and the appropriate discount rate for valuing future earnings is, therefore, endogenized given an economy ...

In a widely cited series of papers, Hassett and Metcalf argue that the slow diffusion of energy saving technology may be due to a high option value to waiting. While the authors clarify that this is relevant for yes/no decisions (such as whether to add insulation to a home), this argument has been widely cited even in investment decisions that involve a choice over multiple appliances or vehicl...

We compare the proceeds that CEOs realize from exercising stock options with the total nominal value (estimated fair value) of option pay that they receive during their tenures. For a sample of CEOs who completed their tenures during the period from 1992 to 2007, we find that the amount realized from exercising options is about 68% of the nominal value of options received and that realized tota...

Purpose of the paper This paper examines how the real option theory is applicable to evaluation of cases of escalation and premature termination of Management Information Systems (MIS) projects. Design/methodology/approach We compare the implications of psychological and economic escalation theories with lessons from the real option theory as applied to MIS projects. Then, we examine published ...