The main purpose of this paper is to account for the two most basic options in the context of a sequential investment project, the option to adjust investment speed and the exit option. Current models of sequential investment ignore the role of a minimal investment rate that must be sustained as long as the project is not abandoned. In most real projects, a positive minimal investment rate provides an incentive for (irreversible) exit from the project. On the other hand, the minimal investment rate still leaves room for adjustment of the investment speed. Therefore, models with realistic (non-extreme) assumptions about the minimal investment should account for both, the exit option and the option to adjust investment speed. In this paper we set up the equations for this dual-option scenario in a continuous (PDE) framework. The resulting model is characterized by the presence of two thresholds describing the optimal decision-making. We provide a robust numerical procedure for the determination of both thresholds. Our analysis reveals that the minimal investment rate creates an endogenous incentive for fast completion that complements the corresponding exogenous incentives. This “incentive-enhancement effect” of the minimal investment rate is reflected by the fundamental statistical characteristics of the sequential project. As a direct consequence of this effect, an increase of the minimal investment rate will always lead to a reduction of the expected time-to-build. Another, striking consequence is that the minimal investment rate can also have a positive effect on the probability of failure (default-risk). This effect occurs under the condition of a low exogenous incentive for fast completion, represented e.g. by poor market expectations for the product to be developed.
Review of Quantitative Finance and Accounting – Springer Journals
Published: May 10, 2011
It’s your single place to instantly
discover and read the research
that matters to you.
Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.
All for just $49/month
Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly
Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.
Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.
Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.
All the latest content is available, no embargo periods.
“Hi guys, I cannot tell you how much I love this resource. Incredible. I really believe you've hit the nail on the head with this site in regards to solving the research-purchase issue.”Daniel C.
“Whoa! It’s like Spotify but for academic articles.”@Phil_Robichaud
“I must say, @deepdyve is a fabulous solution to the independent researcher's problem of #access to #information.”@deepthiw
“My last article couldn't be possible without the platform @deepdyve that makes journal papers cheaper.”@JoseServera