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Review of Quantitative Finance and Accounting
Published in:

10-01-2024 | Original Research

Corporate investment decisions with switch flexibility, constraints, and path-dependency

Authors: Spiros H. Martzoukos, Nayia Pospori, Lenos Trigeorgis

Published in: Review of Quantitative Finance and Accounting | Issue 3/2024

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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.
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Footnotes
1
Standard assumptions include continuous-time capital asset pricing (Merton 1973b; Breeden 1979), absence of market imperfections (taxes etc.), market completeness (spanning), and an all-equity firm facing proprietary investments.
 
2
Using ten time steps instead of five between decisions improves investment option value accuracy insignificantly only. In general, denser grids are relatively more important for out-of-the-money options.
 
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Metadata
Title
Corporate investment decisions with switch flexibility, constraints, and path-dependency
Authors
Spiros H. Martzoukos
Nayia Pospori
Lenos Trigeorgis
Publication date
10-01-2024
Publisher
Springer US
Published in
Review of Quantitative Finance and Accounting / Issue 3/2024
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI
https://doi.org/10.1007/s11156-023-01234-4

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