" Real Option Exercise: Empirical Evidence"

We use detailed project-level investment data to examine the real option exercise decisions of firms. While aspects of exercise decisions are consistent with real option theory, firms’ exercise behavior deviates from standard real option models in systematic and economically meaningful ways. Although project Net Present Value (NPV) is positive at the time of exercise, firms forego 52% of option value by not delaying investment. Using localized exogenous variation in peer investment activity we identify a channel linked with early exercise based on responses to competitors’ exercise decisions. Our evidence is consistent with agency frictions and information externalities affecting investment timing and project value.

Presenta: Erik Gilje (Wharton and NBER)