Corporate Investment Decisions with Switch Flexibility, Constraints, and Path-dependency

Martzoukos, Spiros; Trigeorgis, Lenos; Pospori, Nayia

Abstract

We model sequential, corporate investment decisions with time-to-build delays, operating scale mode switching, operating constraints, and path dependencies. We also account for stochastic salvage (abandonment) values that are utilization (path) dependent. Our results highlight a key link between economic depreciation, stochastic salvage values and operational flexibility with asymmetric switching costs. We further identify conditions uncovering a non-conventional impact of resulting path-dependencies on the investment-uncertainty relationship: higher uncertainty and lower asset return shortfall (“dividend yield”) may expedite, rather than delay, corporate investment. High switching costs, operating constraints, and economic depreciation may reduce or eliminate these non-conventional effects.

Citation

Martzoukos, S., Trigeorgis, L., & Pospori, N. (2024). Corporate Investment Decisions with Switch Flexibility, Constraints, and Path-dependency. Review of Quantitative Finance and Accounting, https://doi.org/10.1007/s11156-023-01234-4

• Journal Article Type: Article
• Acceptance Date: Nov 23, 2023
• Online Publication Date: Jan 10, 2024
• Publication Date: Jan 10, 2024
• Deposit Date: Nov 23, 2023
• Publicly Available Date: Jan 19, 2024
• Journal: Review of Quantitative Finance and Accounting
• Print ISSN: 0924-865X
• Electronic ISSN: 1573-7179
• Publisher: Springer
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1007/s11156-023-01234-4
• Public URL: https://durham-repository.worktribe.com/output/1948169