1 option
Irreversible Investment, Real Options, and Competition: Evidence from Real Estate Development / Laarni Bulan, Christopher J. Mayer, C. Tsuriel Somerville.
- Format:
- Book
- Author/Creator:
- Bulan, Laarni.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w12486.
- NBER working paper series no. w12486
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Other Title:
- Irreversible Investment, Real Options, and Competition
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2006.
- Summary:
- We examine the extent to which uncertainty delays investment and the effect of competition on this relationship using a sample of 1,214 condominium developments in Vancouver, Canada built from 1979-1998. We find that increases in both idiosyncratic and systematic risk lead developers to delay new real estate investments. Empirically, a one-standard deviation increase in the return volatility reduces the probability of investment by 13 percent, equivalent to a 9 percent decline in real prices. Increases in the number of potential competitors located near a project negate the negative relationship between idiosyncratic risk and development. These results support models in which competition erodes option values and provide clear evidence for the real options framework over alternatives such as simple risk aversion.
- Notes:
- Print version record
- August 2006.
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