About the Conference

Program 2021

Abstracts & Papers 2021

Paper Management



Past Papers


Annual International Conference on Real Options: Theory Meets Practice

Program Sessions Summary Guide

Day 1 – Thursday September 2

                                      Track I                                                     Track II

 8:45 –  8:55

Welcome & Guidelines

 9:00 – 10:15

Strategy & Switching Applications

Operations & Applications

10:30 – 11:45

Energy & Renewables

Contract Design & Pricing

12:00 – 1:00


  1:00 – 2:15

Option Games & Exit

Investment Dynamics, Financing & Learning

  2:30 – 3:45


Product Markets & Investment

  4:00 – 5:15

Public Policy Issues

Capital Investment & Financing

Day 2 – Friday  September 3

                                        Track I                                                   Track II

 8:15 – 8:55

Registration/Coffee & President’s Welcome

 9:00 – 10:15

Acquisitions & Cooperation

Contract Design, Auctions & Concessions

10:45 – 12:00

Energy Applications

Network Interactions: Integration, Cost & Trade Credit

12:00 – 1:30


1:30 – 2:45

Energy & Environmental Policy

Investment, Tech Adoption &  Behavioral Finance

3:00 – 4:15

Investment & Learning

Public Ownership & Corporate Cash Holdings

4:45 – 5:30

Keynote Address by Erwan Morellec (EPFL)

5:40 – 6:30

Panel Discussion – The Pandemic, Digitalization & Real Options: Challenges and Future Prospects

6:30 – 7:30

Networking Reception

  Day 3 – Saturday  September 4

                                        Track I                                                   Track II

 9:00 – 10:15

Resource Suspension, Expansion & Exchange Options

Invest. Capacity & Timing I

10:45 – 12:00

Strategic Investment & Games

Invest. Capacity & Timing II

Papers and Abstracts

Thursday Sept 2, 2021

Track I

Strategy, Switching & Applications

Chairperson: Dean Paxson (University of Manchester, United Kingdom)

Uncertain Commodity Prices and Informed Sensitivity Analyses

Babak Jafarizadeh (Heriot-Watt University, United Kingdom)

Discussant: Dean Paxson (University of Manchester, United Kingdom)

From corporate budgeting to public planning, we hear that commodity prices are uncertain and that when they vary, key investment measures sway with them. However, claiming that commodity prices are outside a firm’s domain of control, corporate decision makers mostly neglect this uncertainty or at best reflect it in naïve sensitivity analyses. Yet, to avoid inferior decisions and loss of value, firms should make decisions that take in the understanding about key uncertain factors. In this paper, we show that the customary practice of analysis with arbitrary “high” and “low” prices is inconsistent with the general understanding about commodity price dynamics and the financial theory. To alleviate this, we suggest a consistent and project-specific sensitivity analysis method that supports valuations and decision making.

Optimization of an Investment Project Portfolio using the Omega Measure

Javier Castro (Federal University of Santa Catarina – UFSC, Brazil)

Edison Tito (Pontificia Catholic University of Rio de Janeiro – PUC-Rio, Brazil)

Luiz Brandão (Pontificia Catholic University of Rio de Janeiro – PUC-Rio, Brazil)

Discussant: Babak Jafarizadeh (Heriot-Watt University, United Kingdom)

Investment decisions usually involve the assessment of more than one project. The most appropriate way to study the feasibility of a project is not to study the project on its own but as part of a portfolio, with correlations between the project inputs and outputs, so that the risks and gains are different from those that would be observed if the projects were studied in isolation. In light of this, the present study proposes a methodology for optimizing a portfolio of investment projects with real options based on the maximization of the Omega performance measure. Classical portfolio optimization methodologies, such as the Markowitz mean-variance formulation, normally use maximization of returns or minimization of risk as the objective function. The great advantage of using Omega as the objective function is that the best relationship between the weighted mean returns and weighted mean losses for the complete distribution of the net present values (NPVs) of the portfolio can be obtained, as the distribution is not restricted to its mean and variance as it is in the Markowitz formulation (1952). Furthermore, real options add value to the portfolio and can be included by extending the marketed asset disclaimer assumption (Copeland & Antikarov, 2003) for a project to all the projects in the portfolio. We give an example to illustrate the proposed methodology. We use Monte Carlo simulation as a tool because of its high level of flexibility in modeling uncertainties. The results show that the best risk-return relationship is obtained by optimizing Omega.

Input-Output Switching Options

Dean Paxson (University of Manchester, United Kingdom)

Roger Adkins (Bradford University, United Kingdom)

Discussant: Javier Castro (Federal University of Santa Catarina – UFSC, Brazil)

Analytical solutions are provided for four basic output, input or output-input switching options, useful for capital budgeting. Extensions enable the manager to evaluate the effect of changing input or output levels, volatilities, or correlations on the thresholds that justify immediate action, and on the real option value. Illustrations show results that are not always intuitive, and depend on the particular type of switching option.

Thursday Sept 2, 2021

Track II

Operations & Applications

Chairperson: Daniel McKeever (Binghamton University, United States)

Evaluation of Flexible Concession Contracts

Naielly Marques (Pontificia Catholic University of Rio de Janeiro - PUC-Rio, Brazil)

Carlos Bastian-Pinto (Pontificia Catholic University of Rio de Janeiro - PUC-Rio, Brazil)

Luiz Eduardo Brandão (Pontificia Catholic University of Rio de Janeiro - PUC-Rio, Brazil)

Bárbara Gonzaga (Pontificia Catholic University of Rio de Janeiro - PUC-Rio, Brazil)

Discussant: Daniel McKeever (Binghamton University, United States)

Several infrastructure concession contracts have shown flexibility in their clauses, whether through demand guarantees, capacity expansion options, or even through options to expand capacity linked to a term extension. In this sense, this article evaluates and analyzes a Brazilian concession contract that has these three flexible clauses under the real options approach. The idea is to verify if all of these clauses are beneficial to the government and the private investor. Our results show that when we consider only the demand guarantees and the natural capacity limit of the concession (cap), the project has a negative net present value. When we consider the option to expand capacity in addition to the demand guarantee clause, we find an insignificant improvement in the project’s value. However, when we consider the option to expand capacity coupled with a conditional term extension besides the demand guarantee clause, we find a flexible concession contract format that appeals to both parties involved, as it generates a significant increase in the project’s value.

Hedging Agribusiness Price Risk with Crop Rotation: An Application in Brazil

Luiz Bastian (Independent Researcher, Brazil)

Carlos Bastian-Pinto (Pontifícia Universidade Católica of Rio de Janeiro, Brazil)

Luiz Brandão (Pontifícia Universidade Católica of Rio de Janeiro, Brazil)

Discussant: Naielly Marques (Pontificia Catholic University of Rio de Janeiro - PUC-Rio, Brazil)

This paper uses the Real Options Theory in the Brazilian agricultural sector to value the financial effect of crop, or cultivation, rotation. To this end, four different annual crops commonly grown in Brazil were selected: Soybeans, Corn, Cotton and Wheat. Then the stochastic process that best suits the uncertain behavior of the historical prices of these crops was determined through several statistical approaches. Monte Carlo simulation modeling is then applied to estimate the financial value of the possibility of cultivation rotation by the Real Options Theory over a projected 10-year planting period. For the Real Options valuation, the Operational Profit of a production in an area of 500 hectares is used. The results show that the actual annual crop rotation option adds significant value to the producer as well as a significant risk reduction. It is also apparent that the lower the price correlation between assets, the greater is the effect of the actual crop rotation options.

Tax-Loss Harvesting: Empirical Evidence

Daniel McKeever (Binghamton University, United States)

Kristian Rydqvist (Binghamton University, United States)

Discussant: Carlos Bastian-Pinto (PUC-Rio, Brazil)

Numerical calculations imply that tax-loss harvesting is valuable to holders of taxable stock accounts. These calculations are based on the assumption that a capital loss on a stock portfolio can always be netted against ordinary income (up to a limit) or a capital gain on the same stock portfolio. We provide market-based evidence that a capital loss that is realized in the beginning of the year is substantially less valuable than a loss that is taken at the end of the year. A simple binomial tree model that captures the resolution of tax rate uncertainty closely mimics observed market prices. Allowing investors to postpone unused losses into the future does not alter the conclusion that realized losses are less valuable early in the year.

Thursday Sept 2, 2021

Track I

Energy & Renewables

Chairperson: Jacco Thijssen (University of York, United Kingdom)

Renewable Energy Investment, Support Schemes and the Dirty Technology Option

Domenico De Giovanni (University of Calabria, Italy)

Elena Iakimova (University of Calabria, Italy)

Discussant: Jacco Thijssen (University of York, United Kingdom)

In a real options framework, we analyse the behaviour of a large energy producer who can invest in a portfolio of Renewable Energy Source (RES) and dirty energy source. Competitive fuel prices challenge the investments in RES. Given a budget constraint, the agent allocates the optimal capacities of both energy instalments and selects the optimal investment time. We use the model to compare the effectiveness of classical support schemes such as Feed-in Tariffs or Green Certificate with respect to forms of taxation of dirty technology such as Carbon Taxes or Carbon Permits. This paper proposes a conceptual framework and qualitative analysis to understand which support system enhances the attractiveness of renewable energy investments.

Leaving Well-Worn Paths: Reversal of the Investment-Uncertainty Relationship and Flexible Biogas Plant Operation

Gordon Briest (Otto-von-Guericke University Magdeburg, Germany)

Lars-Peter Lauven (University of Kassel, Germany)

Stefan Kupfer (Otto-von-Guericke University Magdeburg, Germany)

Elmar Lukas (Otto-von-Guericke University Magdeburg, Germany)

Discussant: Domenico De Giovanni (University of Calabria, Italy)

The ongoing trend towards increasing share of intermittent renewable power generation, triggered by societies’ commitment for a more sustainable economy, leads to a growing demand for technological flexibility to guarantee a stable power grid. Since maintaining such flexibility is inherently costly, its economic valuation is of crucial importance when it comes to stimulate power grid stabilizing investments. We propose a dynamic investment model to study investment behavior under conditions that are common for flexibility-providing energy projects. Our model adds to the literature in several novel ways. First, we use time series-based optimization approaches, i.e. a single unit commitment model, to determine, validate and parametrize exponential Ornstein-Uhlenbeck (OU) revenues as state variable for the real options model in a biogas plant flexibilization case study. Second, from a theoretical perspective, our findings suggest that for specific commodity revenue processes, i.e. exponential OU processes, the well-known option driven incentive to wait acts besides a new uncertainty-driven intrinsic investment incentive. Hence, higher uncertainty may lead to earlier investment. Third, we show how the results influence managerial decision making in practice and can be used to shape the design of an optimal renewable support scheme.

Optimal Abandonment with Levy Jumps, Randomization over Thresholds and Electricity Production

Laura Delaney (City, University of London, United Kingdom)

Jacco Thijssen (University of York, United Kingdom)

Discussant: Gordon Briest (Otto-von-Guericke University Magdeburg, Germany)

This paper considers an abandonment problem in which the underlying uncertainty over future demand is modelled as a spectrally negative Levy jump diffusion. We show that the solution to the corresponding optimal stopping problem may not be a threshold policy. We derive the conditions under the solution is a threshold policy and show these may fail when the jumps are large. In the latter case we show that the optimal abandonment strategy consists of randomizing over thresholds. As a result, abandonment may be optimal sooner than the classical solution implies. We illustrate these results by applying them to a model of investment in carbon-capture and storage by an electricity producer faced with a stochastically evolving carbon price. In the presence of random jumps in the carbon price, e.g., due to supply restrictions of carbon permits, in addition to (Brownian) trading noise, the firm may be pushed into randomization over investment times and, consequently, invest in carbon abatement technology sooner. This suggests that policy uncertainty may speed up decarbonization.

Thursday Sept 2, 2021

Track II

Contract Design & Pricing

Chairperson: Lenos Trigeorgis (University of Cyprus)

LPVR Auctions and Flexible-Term Concession Contracts under Uncertainty

Carlos Bastian-Pinto (Pontifícia Universidade Católica of Rio de Janeiro, Brazil)

Naielly Lopes Marques (Pontifícia Universidade Católica of Rio de Janeiro, Brazil)

Luiz Brandão (Pontifícia Universidade Católica of Rio de Janeiro, Brazil)

Discussant: Francesco Baldi (University of Turin and LUISS Guido Carli University)

LPVR type of Auctions have been regarded as the best solution to demand risk sharing between concessionaire and regulators in infrastructure concessions. Yet implementation has been infrequent, mostly because of the strong opposition by concessionaires who do not see an equitable compensation for demand risk asymmetry. We review and analyze of all the aspects of LPVR auctions and other similar approaches of Flexible Term Concession (FTC), and propose a Real Options model that considers LPVR principles but treats uncertainties and flexibilities in a more informative and applicable way.

Pricing Mechanisms and Early Termination in Road Infrastructure Projects

Carlos Andrés Zapata (Universidad Externado, Colombia)

Carlos Armando Mejía (Universidad Externado, Colombia)

Discussant: Carlos Bastian-Pinto (PUC-Rio, Brazil)

This paper contributes to the literature about the compensation mechanisms in infrastructure projects, as well as their valuation. Based on real options theory, we analyze the early termination mechanism in road infrastructure projects as an option to abandon considering optimal stopping rules for American Put options. In that sense, we focused on the point of view from the private party (the concessionaire) in which the termination fee is determined upon different schemes: a fixed termination fee and a stochastic termination fee.

Designing Optionality in Biopharma Licensing Agreements

Francesco Baldi (University of Turin and LUISS Guido Carli University, Italy)

Lenos Trigeorgis (University of Cyprus, Cyprus)

Discussant: Carlos Andrés Zapata (Universidad Externado, Colombia)

The article provides new insights into how licensing-based strategic alliances between firms in the biopharmaceutical industry really work illustrating the main deal-making business practices concerning the therapy areas most frequently encompassed, the timing of negotiations at distinct R&D stages, the financial terms and the typical value splits among the parties. In light of the above, it deals with optionality in sequential innovation and its interaction with licensing design, thus modeling R&D development where a licensor licenses a technology to a licensee and analyzing embedded real options across different types of licensing contracts. It addresses how to structure and value biopharmaceutical licensing agreements focusing on which party controls R&D drug development and hence interim continuation/abandonment decisions. Standard contractual licensing schemes are classified along these dimensions and valued as multistage options. The article reexamines the fairness of the value appropriation split between the parties after accounting for optionality and uncertainty and considers tradeoffs between fixed payments and royalties. Finally, extending the idea to a portfolio level, a R&D portfolio strategy framework is developed to help a pharma company analyze internal drug development opportunities and flexibly manage related investment/divestment decisions so as to enhance shareholder value.

Thursday Sept 2, 2021

Track I

Option Games & Termination

Chairperson: Kuno Huisman (Tilburg University, Netherlands)

Renewable Investment with Subsidy Termination Risk

Roel Nagy (NTNU, Norway)

Stein-Erik Fleten (NTNU, Norway)

Lars Hegnes Sendstad (NTNU, Norway)

Discussant: Anne Balter (Tilburg University, Netherlands)

Investments that encourage a transition, such as the transition from fossil fuels to renewable energy, are often subsidized. However, with recent technological advances, subsidy termination is becoming increasingly relevant. We study a firm faced with an option to invest in a project eligible for subsidy. The subsidy can be withdrawn due to unexpected events, such as depletion of public budgets or a change in political support. We use a regulation of irreversible capacity expansion model as a baseline, in which a firm has the choice to expand capacity and the social planner sets a subsidy. Our contribution to the literature is to account for termination of the subsidy in this model.

Get Out or Switch and Down-scale: Competitive Strategies in a Declining Duopoly Market

Roger Adkins (Bradford University, United Kingdom)

Alcino Azevedo (Aston University, United Kingdom)

Dean Paxson (University of Manchester, United Kingdom)

Discussant: Roel Nagy (NTNU, Norway)

We propose solutions for a multi-factor real option duopoly game model which determines the optimal time to divest in an incumbent technology or to switch to a new small-scale technology, under uncertainty about the output price and the output quantity is declining over time. We use two formulations, one in which the option to divest and the option to switch are treated separately and another in which these two options are mutually exclusive. For the technology switch, there is a second-mover revenue market share advantage, whereas for the divestment there is a first-mover salvage value advantage. We find that curiously the leader should exit earlier as quantity declines faster, if there are no other options, yet, if there is an alternative technology for lower operating costs, it should adopt it sooner than the follower, but both are motivated to adopt earlier as the quantity decline rate increases, so look at the choices and decisions of your competitors before exiting or downsizing with lower cost technology. Moreover, the market share advantage of the follower, while operating alone with the incumbent technology, plays an important role in the timing of the technology switch, delaying the switch of both firms.

Effects of Creative Destruction on the Size and Timing of Investment

Anne Balter (Tilburg University, Netherlands)

Kuno Huisman (Tilburg University, Netherlands)

Peter Kort (Tilburg University, Netherlands)

Discussant: Alcino Azevedo (Aston University, United Kingdom)

In the current innovation-driven economy project lives are short due to the economic phenomenon ``creative destruction''. This paper investigates its implications for optimal firm investments. We find that if the firm is a monopolist, a reduced length of the project life does not affect the size of the investment but the firm waits longer for better market conditions before it invests. If, in addition, the option to invest could also expire in finite time, the firm invests earlier and less. Besides a monopoly setting we also investigate a duopoly. An entry deterring incumbent invests in the same way as the monopolist except that the incumbent will invest earlier in a scenario where the investment option never expires. When, initially, firms are both potential entrants, the project life being finite reduces the incentive to preempt the investment of the opponent. Finally, we show that considerable value losses will be achieved when the project life being finite is mistakenly not taken into account in taking the investment decision. This value loss is enlarged by the preemption effect just mentioned.

Thursday Sept 2, 2021

Track II

Investment Dynamics, Financing & Learning

Chairperson: Elettra Agliardi (University of Bologna, Italy)

Optimal Capacity Investment Decisions with Production Flexibility and Supplier Trade Credit

Nicos Koussis (Frederick University Cyprus, Cyprus)

Florina Silaghi (Universitat Autònoma de Barcelona, Spain)

Discussant: Elettra Agliardi (University of Bologna, Italy)

This paper analyzes optimal capacity investment decisions of a buyer firm receiving trade credit from a supplier under demand uncertainty. Within a real option framework, we analyze two scenarios: a flexible and an inflexible (rigid) buyer firm. The flexible firm can temporarily suspend operations when market conditions deteriorate, while the inflexible firm always produces at full capacity. We find that the flexible firm orders higher quantities from the supplier and trade credit value is higher for the flexible firm, however trade credit as a proportion of buyer firm value is higher for the inflexible firm. Moreover, we find that the supplier extends higher trade credit durations to the flexible firm. Our framework provides predictions regarding the effects of extending credit duration on trade credit values and default policies of the flexible compared to inflexible firm. We also analyze the effects of supplier’s pricing, uncertainty in downstream markets, recovery value of trade credit for the supplier at default, operating profit margins of buyer firms and buyer capacity constraints on the differences in trade credit values, ordered quantities and trade credit maturity between the flexible and rigid firm. Finally, we extend the setting to study the effect of switching costs on the flexible firm’s policies in the presence of trade credit.

Investment and Financing Decisions with Learning-curve Technology

Sudipto Sarkar (McMaster University, Canada)

Chuanqian Zhang (William Paterson University, United States)

Discussant: Nicos Koussis (Frederick University, Cyprus)

The learning curve has a significant impact on production cost (hence corporate profit) in a number of industries. While it is well recognized in the Economics literature and its effect on operating costs and production decisions has been widely studied, its effect on corporate investment has been largely unexplored. To our knowledge, there is one paper that examines this issue, but it is limited to unlevered firms. We therefore examine a levered firm’s optimal investment and financing choices when using learning-curve technology. The main findings are as follows. The effect of leverage on the investment decision depends on the level of debt. Using the optimal debt level will result in earlier investment, whereas the investment size might be smaller or larger depending on the speed of learning; however, investment overall (taking into account both timing and size) will be higher than an unlevered firm, and the difference an increasing function of learning speed. The optimal leverage ratio is an increasing function of learning speed, but with a borrowing constraint it is, in general, initially increasing and subsequently decreasing in learning speed. Moreover, it is a decreasing function over a wider range for a more stringent borrowing constraint, for decreasing-returns-to-scale technology and for a less volatile product market.

Long-term Profitability, Earnings Mean-reversion and Optimal Capital Structure

Elettra Agliardi (University of Bologna, Italy)

Marios Charalambides (Frederick University, Cyprus)

Nicos Koussis (Frederick University, Cyprus)

Discussant: Sudipto Sarkar (McMaster University, Canada)

We develop a dynamic trade-off model with mean-reversion in earnings and multiple stages of lumpy investments with infrequent leverage adjustments at investment points. We provide insights on the impact of earnings dynamics with respect to long-term profitability, mean reversion speed and volatility of earnings on firm value, the dynamics of leverage and credit spreads. We also provide managerial implications regarding the optimal timing of investment and default related to model parameters and in particular the characteristics of the earnings process. Our model shows that the relation between current profitability and leverage generally follows a U-shape and thus the empirically observed negative relation between profitability and leverage is plausible for a certain range of earnings. Our analysis highlights the importance of identifying the data generating process of earnings since it has important implications on understanding firms’ capital structure decisions such as financial conservatism and low leverage phenomena.

Thursday Sept 2, 2021

Track I


Chairperson: Elmar Lukas (Otto-von-Guericke-University Magdeburg, Germany)

Radical vs. Incremental Innovation under Competition with Imitator Lag

Stefan Kupfer (Otto-von-Guericke-University Magdeburg, Germany)

Elmar Lukas (Otto-von-Guericke-University Magdeburg, Germany)

Gordon Briest (Otto-von-Guericke-University Magdeburg, Germany)

Discussant: Chang-Chih Chen (Providence University, Taiwan)

Firms engaging in innovations not only face high investment costs but also tremendous R&D expenditures to develop a new product. Success in the R&D phase enables a firm to bring the new product to market. However, all prosperous products attract competitors and motivate product imitations. These imitations alter the market power of the innovator and thus the product life cycle of the innovation after the imitator optimally imitates and overcomes its project lag. We model the innovation competition of two firms of innovator and imitator type. The successful firm starts the market competition becoming the leader while the other firm gets an option to imitate the innovation as a market follower. We derive the optimal investment strategy for both competitors as well as the expected profitability for the both firms under innovation competition.

Innovation and Patent Litigation with Financial Constraints: American versus English Rule

Danmo Lin (University of Warwick, United Kingdom)

Du Liu (University of Warwick, United Kingdom)

Elizabeth Whalley (University of Warwick, United Kingdom)

Discussant: Stefan Kupfer (Otto-von-Guericke-University Magdeburg, Germany)

We build a compound real options model to examine the impact of legal systems on firms’ strategies related to patent litigation, with the presence of capital market frictions. We show that the English rule (i.e., “loser pays”) and the American rule (i.e., “each litigant pays its own cost”) interact with firms’ financial constraints differently, leading to the English rule shift the effective bargaining power from the operating patent owner (the “incumbent”) to the alleged infringer (the “challenger”). We find that under the English rule, (1) the royalty rate in an ex-post settlement (i.e., settlement after the filing of a lawsuit) is lower; (2) the negative effect of product market volatility on settlement likelihood is more significant; (3) the litigation thresholds are more sensitive to a key product market characteristic (i.e., “gain-to-loss ratio”); (4) firms have lower incentive to innovate, all compared to the American rule. Furthermore, we find that the winning probability of the incumbent lowers the settlement likelihood under the American rule, but it increases the settlement likelihood under the English rule. This paper takes a first step in understanding how legal systems affect corporate innovation, and it generates new testable implications regarding IP litigation with financing considerations.

Innovation and Optimal Debt Policy

Chang-Chih Chen (Providence University, Taiwan)

Kung-Cheng Ho (Zhongnan University of Economics and Laws, China)

Jinqiang Yang (Shanghai University of Finance and Economics, China)

Discussant: Danmo Lin (University of Warwick, United Kingdom)

We build an integrated model of innovation and capital structure. In the model, firms choose leverage, invest in R&D, and pay wages determined by the balance between the value of inventors’ employment contract and available R&D benefit. Firms’ desire for R&D benefit limits and could even destroy their willingness to use debt. The concavity of marginal R&D-value loss due to debt use makes firms react more to tax rises than to tax cuts when adjusting toward the target leverage ratio. Our model implications help explain puzzling leverage phenomena: the zero-leverage anomaly, the mixed leverage-wage relation, and the asymmetric leverage-to-tax sensitivity.

Thursday Sept 2, 2021

Track II

Product Markets & Investment

Chairperson: Hamed Ghoddusi (California Polytechnic State University, USA)

Optimal Platform Pricing when Consumers have Real Options

Hamed Ghoddusi (California Polytechnic State University, USA)

Alexander Rodivilov (Stevens Institute of Technology, United States)

Baran Siyahhan (Institut Mines-Telecom Business Schoo, France)

Discussant: Igor Kravchenko (IST-ID and CEMAT, Portugal)

This paper examines the effect of technological uncertainty on the optimal pricing and investment decisions in a two-sided market. A platform offers a basic good and a developer offers a complementary good. The performance of the complementary good is stochastic and is endogenously determined by the pricing policy the platform adopts. Heterogeneous consumers join the platform either before uncertainty is resolved or after. In the former case, consumers obtain the basic good and an option to benefit from the complementary good in the future. The platform trades off building an earlier mass of consumer base and extracting profits from late adopters. Consumers are divided into three groups: early adopters, late adopters, and those who never join the platform. A platform's pricing policy depends on the value of the complementary good and the cost of its development. If the cost is small, a price skimming policy is optimal. When the cost is higher, price skimming remains optimal if the value of the complementary good is either small or relatively high. For intermediate values, the platform adopts a price penetration policy. We discuss some examples from the empirical literature in light of the model.

Competition, Investment Reversibility and Stock Returns

Zhou Zhang (NEOMA Business School, France)

Discussant: Hamed Ghoddusi (California Polytechnic State University, USA)

This paper investigates the role of investment reversibility in determining the relation between product market competition and stock returns. We develop a unified real-option framework involving corporate investment and disinvestment decisions in a continuous-time Cournot-Nash equilibrium. The model predicts that stock returns are more negatively correlated with the level of competition when investment is more reversible. We use asset redeployability as a measure of investment reversibility and find robust empirical evidence supporting our theoretical prediction. This paper provides a new perspective (i.e. investment reversibility) to understand the competition-return relation which has mixed evidence in the existing literature.

Investment with Switching Modes

Cláudia Nunes (Universidade de Lisboa, Portugal)

Carlos Oliveira (EMAPRE, Universidade de Lisboa, Portugal)

Igor Kravchenko (IST-ID and CEMAT, Portugal)

Discussant: Zhou Zhang (NEOMA Business School)

In this paper we study the optimal control problem of a firm that may operate in two different modes, one being more risky than the other, in the sense that in case the demand decreases, the return of the risky mode is lower than with the more conservative mode. On the other side, in case the demand increases, the opposite holds. The switches between these two alternative modes have associated costs. In both modes, there is the option to exit the market. We focus on two different parameter scenarios, that describe particular (and somehow extreme) economic situations. In the first scenario, we assume that the market is expected to increase in such a way that once the firm is producing in the more risky mode, it is never optimal to switch to the more conservative one. In the second scenario, there is a hysteresis region, where the firm is waiting in the more risky mode, in production, until some drop or increase in the demand leads to an exit or changing to the more conservative mode. This hysteresis region cannot be attained under continuous production. We then address the problem of the optimal time to invest when the firm knows, {\em a priori}, that may invest in one of these two modes and then may switch. Depending on the relation between the switching costs (equal or different from one mode to another), it may happen that the firm invests in the hysteresis region.

Thursday Sept 2, 2021

Track I

Public Policy Issues

Chairperson: Elizabeth Whalley (University of Warwick, United Kingdom)

Optimal Market Entry Cap when Production has Negative Externalities: A Policy Perspective

Yishay Maoz (The Open University, Israel)

Luca Di Corato (Università Ca' Foscari Venezia, Italy)

Discussant: Chi Truong (Macquarie University)

In markets where production has adverse externalities, policy makers may wish to increase welfare by imposing a cap on market entries. In this study, we examine the implications that the cap has on the firms’ entry equilibrium policy and on social welfare in the presence of market uncertainty. In contrast with previous literature, we explicitly consider the presence of an externality which is a convex function of aggregate quantity in the market and then let the social planner choose the cap level maximizing welfare. We find that the planner's optimal policy is either to ban any further market entries, or allow more entries until market quantity reaches a certain cap. Both the likelihood that the cap option will be preferred and the size of the optimal cap are increasing in profit uncertainty, decreasing in the speed by which the external cost grows faster than the private cost, and decreasing in the market quantity already installed when the decision on the cap is taken.

The Value of Species Existence, Climate Variability, and Investments in Habitat Enhancement

Elizabeth Whalley (University of Warwick, United Kingdom)

Discussant: Yishay Maoz (The Open University, Israel)

We build a real options model to investigate when it is worthwhile investing in costly measures which enhance the habitat for a species in a particular area and thus increase the species viability. To this end we quantify the existence value of a species as the discounted value of a constant flow of benefits received as long as that species continues to survive within a particular area of interest and determine the change in that value if habitat enhancement measures are taken. We also investigate whether increased climatic variability make these measures more valuable, in terms of enhancing existence value. Using a model which incorporates stochastic logistic growth in population size, Allee effects (where due to additional co-operation/protection/mating opportunities there is positive density dependence in the mean growth rate for intermediate population densities) and potential immigration, we find that increased environmental stochasticity, for example due to increased temperature variability, increases the probability of extinction and thus decreases existence values for a given population size, but also increases the effectiveness of habitat enhancement measures. So, particularly when species are close to extinction, higher risk due to climatic variation makes it more worthwhile to invest in habitat enhancement measures which reduce the likelyhood of extinction, and to do so over a wider range of population sizes. In future work we will consider two habitat patches, subject to imperfectly correlated environmental variability, in order to investigate factors which influence the marginal benefits of an additional habitat patch and of patch connectivity.

Bayesian Adaptation to Catastrophic Risk under Climate Uncertainty

Chi Truong (Macquarie University, Australia)

Stefan Trueck (Macquarie University, Australia)

Ken Siu (Macquarie University, Australia)

Michael Goldstein (Babson College, United States)

Discussant: Elizabeth Whalley (University of Warwick, United Kingdom)

We present a novel framework for the valuation of investments to mitigate risks from extreme climate events. Our model allows for decision-making on investments, taking into account deep uncertainty about climate change, and how this uncertainty changes when future climate observations become available. We show that the model is useful even when the time required to resolve uncertainty is indefinite. We further examine the impact of risk and uncertainty on optimal decisions, also comparing our results to a situation where the net present value (NPV) rule is used to guide investment. In an empirical application, we implement the model for bushfire risk management in a region in New South Wales, Australia. Our findings suggest that adaptation decisions based on the NPV rule are typically not optimal and result in a significant loss, since the value of the investment option is ignored. Further results from conducted sensitivity analysis suggest that the loss is large when the investment cost is high, when the uncertainty resolution is slow, or when the probability belief in climate change is low. Importantly, the proposed framework is also consistent with the precautionary principle, leading to earlier investment under high uncertainty together with a low rate of learning.

Thursday Sept 2, 2021

Track II

Capital Investment & Financing

Chairperson: Nick Huberts (University of York, UK)

Optimal Project Promotion Strategies for Crowdfunding Platforms

Vineeth Varma (Université de Lorraine, CNRS, CRAN, France)

Linda Salahaldin (ESCE, France)

Salah Elayoubi (Université Paris Saclay, CNRS, CentraleSupélec, France)

Discussant: Herbert Dawid (Bielefeld University, Germany)

We study in this paper crowdfunding from the platform perspective. We consider a platform where several project campaigns are running and competing on fund collection. The platform manager's objective is to increase the proportion of successful projects and he uses the lever of project promotion on the platform website to influence the funders' and balance the potential future funds between projects. We first consider the platform policy derivation as an optimization problem and show to derive the optimal project promotion policy. We then consider the more realistic setting where the platform manager adapts his policy online when observing the status of fund collection. We model this online strategy as a real option and develop a dynamic programming algorithm that finds the optimal strategy depending on the observed project campaign status.

Hedging Effect of Low-Quality Capital Assets in Competitive Industries

Hamed Ghoddusi (California Polytechnic State University, United States)

Thomas Dangl (TU Wien, Austria)

Discussant: Linda Salahaldin (ESCE, France)

We highlight the impact of capital quality, i.e., the depreciation rate of capital assets, on firms' investment behavior, endogenous output price dynamics, and industry equilibrium outcomes. To rigorously examine this question, a continuous-time model of dynamic capacity investment under uncertainty is presented where the spot price of a depreciating capital asset is determined in a market equilibrium. The lower-quality (shorter-lived) capital depreciates faster and, thus, requires a higher level of reinvestment. In equilibrium, competitive firms may show a higher willingness to pay for the low-quality capital since depreciation provides an embedded hedge feature for the firm value. In particular, we show that demand elasticity is one of the key determinants of the willingness to pay; ceteris paribus, firms may prefer a high-quality capital in a market with high price elasticity of demand and the low-quality capital in a market with highly inelastic demand. We derive closed-form solutions for the optimal investment policies as well as the steady-state distribution of endogenous output prices and the dynamics of aggregate capital in the economy. We also show that with incremental investment and marked-to-market capital goods prices, the net present value of new investment opportunities is always equal to zero.

Capacity Investment with Debt Financing: A Double Marginalization Effect

Herbert Dawid (Bielefeld University, Germany)

Nick Huberts (University of York, United Kingdom)

Kuno Huisman (Tilburg University, Netherlands)

Peter Kort (Tilburg University, Netherlands)

Xingang Wen (Bielefeld University, Germany)

Discussant: Hamed Ghoddusi (California Polytechnic State University, United States)

This paper considers a firm's investment decision in a market environment with stochastic evolution of the (inverse) demand, where the investment is financed by borrowing. The lender has market power, generating a capital market inefficiency. The investment decision of the firm involves to determine the timing and the capacity level given a coupon rate schedule offered by the lender. It is shown that a double marginalization effect arises in the sense that the lender's market power results in a considerably smaller investment compared to internal financing, while the timing of the investment stays the same. Introducing the bankruptcy option mitigates the double marginalization effect. In particular, the firm's investment size is increasing with the costs the lender faces when taking over a bankrupt firm's capital, albeit at the expense of an investment delay. For initial conditions in the stopping region welfare increases with increasing bankruptcy costs, whereas for initial conditions in the continuation region an inverse U-shaped dependence might arise.

Friday Sept 3, 2021

Track I

Acquisitions & Cooperation

Chairperson: Arkadiy Sakhartov (University of Illinois, United States)

Toehold Acquisition as a Sequential Real Option

José Lacerda (University of Porto, Portugal)

Paulo J. Pereira (University of Porto, Portugal)

Artur Rodrigues (University of Minho, Portugal)

Discussant: Tine Compernolle (University of Antwerp, Belgium)

This paper studies how a pre-bid minority ownership in the target firm (toehold) can improve the acquirer's position in a takeover, specifically by analyzing its effect in reducing the information asymmetries between the target and bidder. We compare the two-stage strategy with the single step takeover. Our results show that staging the takeover process becomes the best strategy to pursue if the bidder is able to keep the first mover advantage, as the target may not realize the true final intentions of the bidder firm. Ex-ante, the choice of the strategy will depend upon the beliefs of the bidder about the capacity of the target in foreseeing its goals. The model is extended to incorporate hidden competition in the bidding process. We show that in the presence of possible of hidden bidders, the hostile takeover occurs earlier for a higher optimal premium, which in turn favours the choice of the two-step strategy, as the required probability of the target being the first-mover becomes lower.

Resource Redeployment in Corporate Acquisitions

Arkadiy Sakhartov (University of Illinois at Urbana-Champaign, United States)

Jeffrey Reuer (University of Colorado, United States)

Discussant: José Lacerda (University of Porto, Portugal)

Resource redeployment, defined as reallocation of a firm’s resources to another product market or between merging firms, has long been at the focus of corporate strategy research. These two dimensions of resource redeployment motivated two respective research streams. However, the two dimensions have always been considered separately. Therefore, this study combines features of the two dimensions and develops a model that considers redeployment of resources between two merging firms that may not necessarily be from the same product market. The model derives multiple intriguing results. First, the marginal case of horizontal merger between firms in the same product market misses the context where redeployment of resources between the acquirer and the target creates the highest value. Notably, redeployment of resources when the merging firms are strongly related to each other creates more value than redeployment of resources when the merging firms operate in the exact same product market, thus demonstrating the inverse U-shaped relationship between the acquirer return and relatedness. Second, value that the acquirer attains in redeploying resources between the merged firms is not determined solely by relatedness. Thus, return volatility enhances the acquirer return, while return correlation reduces that return. The effect of the current return advantage of the acquirer over the target depends on whether the main challenge for the acquirer is to evaluate the target or to integrate the target.

Cooperation over Investment in CO2 Emission Reduction Technology

Tine Compernolle (University of Antwerp, Belgium)

Jacco Thijssen (University of York, United Kingdom)

Discussant: Arkadiy Sakhartov (University of Illinois at Urbana-Champaign, United States)

An increasing concern for climate change puts pressure on industrial firms to implement practices for carbon emission reductions. Recently, it has been recognized that such carbon emission reductions can be realized through cooperation among firms in industrial chains.. It has been assumed in the literature that industrial symbiosis will emerge spontaneously, as an independent choice of both parties involved, under the condition that all parties achieve an economic benefit sufficient to cover the risk of the investment, i.e. the NPV of cooperation should exceed the sum of individual firm NPVs. However, such analysis has never been made in a dynamic context. We show that a joint venture between a CO2 emitting firm and a firm that can use the CO2, will result in a higher probability that an investment in CO2 capture will take place within a specific time period. This is an important result, given that the EU has set binding targets to its Member States for reducing their emissions.

Friday Sept 3, 2021

Track II

Contract Design, Auctions & Concessions

Chairperson: Luiz Brandão (PUC-Rio, Brazil)

Bidding Price under Uncertainty: An Application to a Mineral Deposit Auction in Brazil

Lucas Mesz (Pontificia Catholic University of Rio de Janeiro, Brazil)

Luiz Brandão (Pontificia Catholic University of Rio de Janeiro, Brazil)

Carlos Bastian-Pinto (Pontificia Catholic University of Rio de Janeiro, Brazil)

Discussant: Felipe Van de Sande Araujo (PUC-Rio, Brazil)

Mineral rights auctions bids are subject to price and geological uncertainty and are affected by managerial flexibility clauses. We analyze the case of a mineral auction in Brazil of a deposit of copper, zinc, lead, silver, gold and cadmium in an area known as Palmeirópolis Polymineral Complex under the real options approach. The model considers both the price and the exploratory-technical uncertainty. The auction rules allow for the firm to abandon the project at different stages of the process, as long as certain prior requirements of capital investment or payments have been met. Considering all options that concession agreements offers, the project value increases by $10.33 million, or 26.85%.

Fiscal Impact of Government Guarantees in PPP Highway Concession Projects

Rodrigo Sant’Anna (Pontifícia Universidade Católica of Rio de Janeiro, Brazil)

Luiz Brandão (Pontifícia Universidade Católica of Rio de Janeiro, Brazil)

Carlos Bastian-Pinto (Pontifícia Universidade Católica of Rio de Janeiro, Brazil)

Leonardo Gomes (Pontifícia Universidade Católica of Rio de Janeiro, Brazil)

Discussant: Lucas Mesz (PUC-Rio, Brazil)

PPPs are adopted worldwide to provide public infrastructure since they offer numerous benefits for public and private partners. Yet, they may present problems due to the multiple uncertainties embedded in the projects. Therefore, in order to attract private investment they may require some form of mitigation of risks. These risk mitigation mechanisms may take many forms: Minimum Traffic Guarantee (MTG) for instance provide the concessionaire with a floor on demand uncertainty. Some kind of government support can be interpreted as options since some pre-established conditions trigger the obligations. Thus, the value of these options under option pricing methods must be appropriately determined while providing value to the private sector, it also places a contingent liability and financial burden on the government budget, which must be adequately priced. The theory of real options offers an approach to these issues. This article contributes to the analysis of these projects through the governmental perspective and how this impact, if incorrectly measured, can adversely affect government finances.

A Model of the Forward Curve of Electric Power: An Application in Brazil

Felipe Van de Sande Araujo (Pontifícia Universidade Católica do Rio de Janeiro, Brazil)

Leonardo Lima Gomes (Pontifícia Universidade Católica do Rio de Janeiro, Brazil)

Luiz Eduardo Teixeira Brandão (Pontifícia Universidade Católica do Rio de Janeiro, Brazil)

Discussant: Rodrigo Sant’Anna (PUC-Rio, Brazil)

The development of a simple and effective mechanism to estimate the value of the forward curve of power could enable market participants to better price hedging position and provide transparency to market outsiders who wish to take a speculative position on the power market. This would, in turn, lead to more liquidity in the market for electricity futures and power derivatives. In this paper we design a model for two market participants, a buyer and a seller of a contract for difference on the future spot price of electricity in southwest Brazil. Those are representatives of all market participants that have need or desire to hedge their future position. We model each participant utility function using a Generalized Extended CVaR Preference and obtain the market equilibrium with the certainty equivalent. The results are compared with prediction of the future spot price of power made by market specialists and found to yield reasonable results when using out of sample data.

Friday Sept 3, 2021

Track I

Energy Applications

Chairperson: Verena Hagspiel (NTNU, Norway)

Investment in a Power-to-Gas Plant: An Application in Germany

Georg Schultes (RWTH Aachen University, Germany)

Reinhard Madlener (RWTH Aachen University, E.ON ERC, FCN, Germany)

Discussant: Semyon Fedorov (NTNU, Norway)

In this paper, a binomial tree real options analysis in discrete time is conducted for the investment case of a 5 MW power-to-gas plant and a 5 MW extension in Germany and an American-style option is used. Four revenue mechanisms are studied to determine the optimal capacity and component composition of the P2G facility: operation at negative prices, operation at low electricity prices, sale of oxygen, and provision of minute reserve. The four scenarios considered are (1) reduction of the revenue flows from the extension to 75% of the actual level; (2) increase in the standard deviation of electricity prices by 1% p.a.; (3) introduction of a gas price subsidy of 2.5 €-ct/kWh; and (4) decrease in investment costs for elec-trolyzer and methanation unit of 1% p.a. We find no profitable investment alternatives, not even for the investigated cases of increased economic merit.

Dynamic Hedging for Management of Hydropower Production with Exchange Rate Risk

Joakim Dimoski (Norwegian University of Science and Technology, Norway)

Stein-Erik Fleten (Norwegian University of Science and Technology, Norway)

Nils Löhndorf (University of Luxembourg, Luxembourg)

Sveinung Nersten (Norwegian University of Science and Technology, Norway)

Discussant: Reinhard Madlener (RWTH Aachen University, Germany)

We study the risk management problem of a hydropower producer that participates in a wholesale electricity market and hedges risk by trading currency and power futures contracts. Our model considers three types of risks: operational risk due to future supply uncertainty, exchange rate risk for operations and trading in different currencies, and profit risks due to power price variability. We cast the problem as a Markov decision process and propose a sequential solution approach to handle the high complexity of the optimization problem. Our contribution is three-fold: first, we show how currency risk and currency derivatives can be included in real option models of hydropower generation; second, we accurately encode the cash flow structure from a portfolio of electricity and currency hedge contracts; and third, we compare optimization under a risk measure with often-used simple hedging strategies. For the case of a Norwegian hydropower producer, we quantify the reduction in risk through currency hedging where there is currency risk. We find that currency hedging leads to a moderate decrease in profit risk, and that including monthly power futures in the hedging strategy allows precision hedging that can contribute to a substantial risk reduction.

Staged Marginal Oil Field Development with Optional Wells

Semyon Fedorov (Norwegian University of Science and Technology, Norway)

Verena Hagspiel (Norwegian University of Science and Technology, Norway)

Thomas Lerdahl (OKEA ASA, Norway)

Discussant: Stein-Erik Fleten (NTNU, Norway)

The decreasing average size of new discoveries in mature production areas makes the oil field investment decision base more uncertain than ever before. As fewer appraisal wells are typically drilled before the development of a small field, new solutions are required to make small discoveries commercial given technical and market uncertainties. Therefore, accounting for managerial flexibility that enables to change the course of the project due to new information, becomes even more important for investment valuation. Combining the real options approach and decision analysis and accounting for both oil price and resource uncertainties, we identify additional value created by sequential drilling strategy for a small field development. We capture the sequence of the key investment and operating decisions in cooperation with an industry partner, to build a realistic project case. Addressing a flexibility to divide the production wells drilling into two stages, we consider the option to wait to expand the production by drilling additional wells after the reservoir information revelation based on a least-squares Monte Carlo algorithm. We identify the conditions under which the staged development is preferred compared to the standard development and propose a decision rule to optimize the expansion timing. Our results suggest that the staged development carries large upside potential for marginal field development under extensive reservoir uncertainty. We also illustrate that hedging against the downside risks within a staged development brings potential to change the original decision regarding the marginal investment opportunity and make it sufficient to pass the final investment decision.

Friday Sept 3, 2021

Track II

Network Interactions, Integration, Cost & Trade Credit

Chairperson: Florina Silaghi (Universitat Autònoma de Barcelona, Spain)

Project Financing and Corporate Integration under Operational and Financial Risk

Maximilian Schreiter (HHL Leipzig Graduate School of Management, Germany)

Discussant: Florina Silaghi (Universitat Autònoma de Barcelona, Spain)

The article addresses the choice between setting up a project entity and integrating the project into a corporation from the perspective of a dynamic corporate finance model in the absence of operational synergies. The analysis builds upon a classic continuous-time framework with tax benefits of debt, costs of default and, more innovatively, a benefit or cost of abandonment derived for two projects with stochastic, correlated revenues. By implementing the model with a simulation-based approach, I show that foremost high correlations, high volatilities and high portions of fixed costs as well as heterogenous volatilities, bankruptcy costs and operational cost structures stimulate independent project structures. Further, a more difficult or costly access to external funds raises the benefits of merging activities in a combined firm.

Investment with Declining Costs Following a Lévy Process

Fredrik Armerin (KTH Royal Institute of Technology, Sweden)

Discussant: Maximilian Schreiter (HHL Leipzig Graduate School of Management, Germany)

We consider the optimal investment problem when the cost of the investment decreases over time. This decrease is modelled using a subordinator, i.e.,an increasing Lévy process.

A Theory of Trade Credit and Procurement, Duration and Optimal Order Quantities

Nicos Koussis (Frederick University, Cyprus)

Florina Silaghi (Universitat Autònoma de Barcelona, Spain)

Discussant: Fredrik Armerin (KTH Royal Institute of Technology, Sweden)

We build a continuous time framework with stochastic downstream market prices of goods and trade credit. The buyer chooses the order quantity accounting for its capacity constraints while the supplier chooses trade credit duration by internalizing the buyer’s capacity constraints and default risk. An optimal trade credit duration chosen by the supplier may arise that is driven by two opposing forces of extending credit, a higher capacity and order quantities due to reduced default risk for the buyer, and on the negative side, a lower present value of proceeds for the supplier due to delayed payment. We provide a number of predictions on the effect of various model parameters including the prices charged by the supplier, the volatility and growth rate of price of goods sold, the operating costs of the buyer and supplier firm, buyer’s capacity constraints and recovery value in case of buyer’s default. We also analyze coordinated network policies under internal versus external procurement showing that trade credit acts as a coordination mechanism limiting coordination losses under external procurement. The cost inefficiencies needed for a firm to move from coordinated to non-coordinated production are also considered.

Friday Sept 3, 2021

Track I

Energy & Environmental Policy

Chairperson: Stein-Erik Fleten (NTNU, Norway)

Investment in a Plastics Circular Economy under Policy Uncertainty

Loïc De Weerdt (University of Antwerp, Belgium)

Verena Hagspiel (Norwegian University of Science and Technology, Norway)

Peter Kort (Universiteit Antwerpen, Belgium)

Carlos Oliveira (Instituto Superior de Economia e Gestão, Portugal)

Tine Compernolle (University of Antwerp, Belgium)

Discussant: Xingang Wen (Bielefeld University, Germany)

The transition towards a circular economy is high on the agenda of, and being endorsed by an increasing number of countries and / or regions in the world. For this study, our primary focus will be on circularity of plastics in the EU. Plastics are one of the most common materials used globally. Recently, action has been taken to start closing the plastics material cycle, as well as to minimize the environmental impact of the material in general. This transition towards a CE is driven by policies and achieved through private investment. Policies can either stimulate, or force investments. This study focusses on a policy compelling a firm to transition in accordance with the regulation, or to exit the market. This type of regulatory uncertain policy has not yet been researched in a real option context.

How Alternative Renewable Energy Support Policies Address Technology Development

Mariia Kozlova (LUT University, Finland)

Stein-Erik Fleten (Norwegian University of Science and Technology, Norway)

Verena Hagspiel (Norwegian University of Science and Technology, Norway)

Discussant: Carlos Oliveira (Instituto Superior de Economia e Gestão, Portugal)

Real options studies have shown that the expectation of renewable energy (RE) technological development and a consequent cost reduction creates an incentive to postpone investments. Such an effect might reduce effectiveness of an RE policy in terms of technology diffusion and its cost-efficiency. However, this effect has been studied only under a simplistic tariff type of RE support. This paper aims to offer a systematic view of how the technology development effect materializes under different RE support mechanisms applying a real options framework to get insight into investors’ behavior.

How Welfare Damaging are EU Environmental Policy Targets In Terms of Welfare?

Simona Bigerna (University of Perugia, Italy)

Verena Hagspiel (Norwegian University of Science and Technology, Norway)

Peter Kort (Tilburg University, Netherlands)

Xingang Wen (Bielefeld University, Germany)

Discussant: Mariia Kozlova (LUT University, Finland)

This research work builds a theoretical model to study the welfare effect by a regulator (EU member state) using feed-in-premium subsidy to motivate a monopoly firm's investment in order to realize the environmental policy target (assigned by the EU), i.e., to reach a certain level of green energy investment within a certain deadline. There is discrepancy between the profit-maximizing firm’s and welfare-maximizing regulator’s investment decisions. Under the iso-elastic demand structure and without the externally imposed policy target, there exists a social welfare maximizing subsidy rate, but no subsidy can align the firm's and the regulator’s decisions. With the imposed policy target and penalties for missing the target, the expected welfare-maximizing subsidy rate differs from that without the policy target, this is because when setting a subsidy rate, the regulator has to balance the direct welfare changes from the subsidy, and the changes in probability to reach the target. Furthermore, this research conducts empirical analysis by calibrating the parameter values for the Italian energy market.

Track II

Investment, Technology Adoption & Behavioural Finance

Chairperson: Paulo J. Pereira (University of Porto, Portugal)

Postponing Investment Decisions: Theory and Experiment

Azzurra Morreale (LUT University, Finland)

Thi Thanh Tam Vu (University of Trento, Italy)

Luigi Mittone (University of Trento, Italy)

Mikael Collan (LUT University, Finland)

Discussant: Elmar Lukas (University Magdeburg, Germany)

It is well-known that real options are valuable, however, if they are not used the value is not realized. This research concentrates on studying decision-maker behavior with regards to the flexibility to postpone investment decision-making that is, we study the real option to postpone and whether and under which experimental conditions it is used by decision-makers. We are also interested in whether the decision-makers are able to price the option to postpone in a way that is in line with theory. The focus of this research is on the behavior of individual decision-makers. Behavioral aspects with regards to real options have received only limited attention in the past and the literature on the topic is quite thin, there is however already some literature on the subject.

Strategies of New Technology Adoption: Laboratory Experiments

Besma Teffahi (Manuba University, Tunisia)

Walid Hichri (Université Lumière Lyon 2, France)

Discussant: Azzurra Morreale (LUT University, Finland)

In this paper we test, by organizing experimental economics sessions, the main results of real-option theory on the strategies of new technology adoption. Thus, we verify, in a first game, the results of Grenadier and Weiss (GW) (1997) concerning the different strategies that the firm can undertake. In a second game of duopoly, we consider the models of Smit and Trigeorgis (2004, Chapter 5) and Huissman and Kort (HK) (2004). We evaluate risk aversion through Holt and Laury's (2002) lottery and the cognitive reflection (CR) through the test of Frederick (2005). Then, we investigate whether risk aversion and /or cognitive ability reinforces cooperation and thus waiting behavior.

On the Choice between Mergers and Acquisitions: An Option Games Approach

Elmar Lukas (Faculty of Economics and Management, University Magdeburg, Germany)

Paulo J. Pereira (School of Economics and Management, University of Porto, Portugal)

Artur Rodrigues (School of Economics and Management, University of Minho, Portugal)

Discussant: Besma Teffahi (Manuba University, Tunisia)

This paper builds on recent advances in the domain of option games under uncertainty and looks closer at determinants that drive the choice between mergers and acquisitions. Each firm calculates its payoff resulting from either a merger or tender offer that then serves as a credible threat when jointly negotiating the terms of a merger. The model suggests that the choice between tender offers and mergers is determined by the firms' relative size and uncertainty, depending on the relative synergies of each strategy. When tender offer synergies are low and when uncertainty is higher, tender offers are preferred by more asymmetric firms, whereas for more synergistic tender offers that relationship is nonlinear, with mergers being preferred for intermediate asymmetry and uncertainty levels.

Friday Sept 3, 2021

Track I

Investment & Learning

Chairperson: Peter Kort (Tilburg University, Netherlands)

Combining Real Options Theory and Diagnosis Related Group Classification for Hospital Management

Milena Rocha (UFMG, Brazil)

Márcio Augusto Gonçalves (UFMG, Brazil)

Yuri Lawryshyn (University of Toronto, Canada)

Discussant: Martijn Ketelaars (Tilburg University, Netherlands)

The hospital environment is considered complex due to the combination of different types of services that need to be performed harmoniously for the final product to be delivered. Given this complexity it is observed the use of Group Related Diagnosis – DRG, a type of patient classification method that assists in hospital management. However, such method is deterministic and does not consider the variations brought by uncertainty regarding the patient's clinical condition. This causes it to add little information to objectively rational decision-making under uncertainty. Therefore, this research aimed to analyze the incorporation of uncertainty and flexibility into the Group Related Diagnosis method through the Real Options Theory - ROT. Thus, we sought to create homogeneous patient groups through an exploratory and documentary research, with a qualitative and quantitative approach, guided by the deductive method. This grouping was based on the combination of diagnoses and outcome of discharge. In addition to the grouping, it was possible to include in the groups the flexibilities that the patient may have during hospitalization, as well as the probabilities of occurrence. Through this research, based on the positivist approach and the functionalist paradigm, it was possible to observe, empirically, the interaction between the ROT and the DRG method. This interaction made possible the proposition of a new classification method, focused on the financial aspects and relevant information provider to make the objectively rational decision.

Staged Manufacturing in New Market Entry

Stein-Erik Fleten (NTNU, Norway)

Mariia Kozlova (LUT, Finland)

Yuri Lawryshyn (University of Toronto, Canada)

Discussant: Milena Rocha (UFMG, Brazil)

The focus of this research is to develop an analytical model in a staged manufacturing situation. We take the viewpoint of a firm contemplating to enter a new market in a two-stage process. An initial investment would allow the firm to serve a market whose demand is significantly uncertain. The idea is that this initial investment will enable the firm to create future growth opportunities that may come to fruition should the market and technology conditions develop favourably. In the case of a positive outcome, the firm will make a large strategic move in the direction of becoming a leading industry player, or niche leader, involving a large investment and business expansion. The initial investment will enable the firm to develop market knowledge, technology know-how and internal capabilities that places it in a position to take a leading industry position. Two aspects of our approach are unique: 1) our model is analytical, and 2) it utilizes managerial estimates. In some ways, our work is an expansion of the news vendor problem.

Optimal R&D Investment: Private and Social Perspectives

Martijn Ketelaars (Tilburg University, Netherlands)

Peter Kort (Tilburg University, Netherlands)

Discussant: Stein-Erik Fleten (NTNU, Norway)

In this paper, we study the research and development (R&D) investment decisions of a monopolist from a private and social perspective. The firm has a finite selection of R&D projects of different sizes to his disposal. A larger R&D project is more costly, but at the same time increases the probability of a breakthrough. The technological progress is modeled by a Poisson process with one jump. We assume that the R&D investment size has a positive effect on the arrival rate, where this relationship exhibits decreasing returns to scale. As such this model feature extends Weeds (2002) in which the arrival rate is a constant. Upon a breakthrough the firm can launch the newly-developed product and receive a revenue stream. Here, we distinguish between immediate launch and the option to defer immediate launch. While the firm wants to maximize his producer’s surplus, a government wants to maximize the total surplus. A government can provide subsidies to influence the timing and size of the firm’s R&D project as well as the firm’s production upon an innovation breakthrough. We analyze whether a government is able to influence the firm’s investment decisions by providing subsidies, and if so, to what extent. Moreover, we study the effects of market conditions, e.g., the product price uncertainty, the product price growth and the interest rate, on the decisions of the firm and a government. We conclude the paper with a case study to show how real options can contribute to the understanding of the interactions between a firm and a government with respect to innovation. Reference Weeds, H. (2002). Strategic Delay in a Real Options Model of R&D Competition. The Review of Economic Studies, 69(3), 729-747. Available here: http://www.jstor.org/stable/1556717

Friday Sept 3, 2021

Track II

Public Ownership & Corporate Cash Holdings

Chairperson: Grzegorz Pawlina (Lancaster University, United Kingdom)

Voluntary Delisting from a Major Exchange

Izidin El Kalak (Cardiff Business School, United Kingdom)

Alcino Azevedo (Aston University, United Kingdom)

Radu Tunaro (University of Sussex Business School, United Kingdom)

Gonul Colak (Hanken School of Economics, Finland)

Discussant: Maria Lavrutich (NTNU, Norway)

In recent years the attractiveness of being a public firm has been declining and we see fewer and fewer IPOs and more and more firms who are voluntarily delisting from the major exchanges. We develop a theoretical model describing the optimal time to voluntarily delist from a major stock exchange. Three key parameters determine a firms optimal time to delist. Its growth rate and business risk (volatility of revenues) combined with the total costs associated with staying public are the main drivers of a firms stochastic probability to delist. To empirically verify our theory's predictions, we implement hazard rate models and confirm that the aforementioned key variables are signicant drivers of a firm's voluntary delisting choice. Further tests are conducted showing how macroeconomic shocks, such as rising political uncertainty and increased regulatory burden, are two major channels through which firms growth rate and business risk get shocked causing changes in the probability of delisting. Finally, we classify our sample firms into firms that took an optimal decision to (de)list versus those that took a non-optimal decision to (de)list, and show that stock market participants reacted differently to these delisting announcements.

Monitoring and Managerial Entrenchment with Corporate Cash Holdings

Panagiotis Couzoff (Universidade Catolica Portuguesa, Portugal)

Shantanu Banerjee (Lancaster University, United Kingdom)

Grzegorz Pawlina (Lancaster University, United Kingdom)

Discussant: Alcino Azevedo (Aston University, United Kingdom)

We develop a dynamic model of a firm where the cash management is partially delegated to a self-serving agent. Shareholders trade off the cost of managerial removal with the cost of managerial discretion over the use of liquid funds. An improvement in corporate governance quality may have a positive or a negative effect on levels and values of cash balances, depending on the source of the improvement. While a reduction of the managerial entrenchment results in lower cash balances and mostly higher marginal cash values, we demonstrate an opposite effect following an increase in the effectiveness of the monitoring of managerial actions. A managerial asset substitution problem produces a novel hump-shaped relation between the firm's liquidity levels and the collective propensity of shareholders and managers to reduce cash flow risk.

Predatory Pricing and the Value of Corporate Cash Holdings

Maria Lavrutich (Norwegian University of Science and Technology, Norway)

Jacco Thijssen (University of York, United Kingdom)

Discussant: Panagiotis Couzoff (Universidade Catolica Portuguesa, Portugal)

We analyze the interaction between firms' payout policies and their decisions in product markets in a continuous-time stochastic game between two firms. One of these is financially constrained, whereas the other is not. Contrary to the standard literature we allow firms to choose production and payout strategies, and focus on the effect of predation incentives on both. We find that predation induces fewer dividend payouts. Furthermore, the liquidity position of the constrained firm has an economically significant effect on the production choices of both firms and, thus, on the evolution of profits, cash holdings and stock returns.

Keynote Address by Erwan Morellec (EPFL, Switzerland)

Panel Discussion - The Pandemic, Digitalization & Real Options: Challenges and Future Prospects

Moderator: Dean Paxson (University of Manchester, UK)

Panelists Include

Luiz Brandao (PUC-Rio, Brazil)

Mikael Collan (LUT University, Finland)

Hamed Ghoddusi (California Polytechnic State University, United States)

Peter Kort (Tillburg University, Netherlands)

Elmar Lukas (University of Magdeburg, Germany)

Paulo J. Pereira (University of Porto, Portugal)

Grzegorz Pawlina (Lancaster University, United Kingdom)

Saturday Sept 4, 2021

Track I

Resource Suspension, Expansion & Exchange Options

Chairperson: Toby Li (Texas A&M University, United States)

Expansion of Foreign Subsidiaries by Multinational Corporations

Arkadiy Sakhartov (University of Illinois at Urbana-Champaign, United States)

Jeffrey Reuer (University of Colorado, United States)

Discussant: Marta Castellini (Università degli Studi di Brescia. FEEM, Italy)

A multinational corporation facing high uncertainty in foreign markets can expand its foreign subsidiaries through a switching option - by redeploying resources from other locations, or through a growth option - by scaling up these subsidiaries on a stand-alone basis. Although the two real options represent natural alternatives, the choice of one versus the other has not been investigated. This study develops a formal model that casts the two real options as a portfolio available to the multinational corporation. Multiple results of the model bring up three novel insights. First, contrary to the prevalent applications of real options theory, neither the strongest advantage of the to-be-expanded foreign subsidiary over other subsidiaries in the firm suffices to justify expansion of that subsidiary through the switching option, nor does the strongest performance of that subsidiary in absolute terms justify its expansion through the growth option. Second, although the cost of implementing each option suppresses its use, this known effect critically depends on other determinants of each of the two options. Finally, while uncertainty monotonically raises the odds that the multinational corporation expands its foreign subsidiary through the switching option, this known effect of uncertainty holds for the growth option only when the growth cost is high. Otherwise, with low growth costs, the use of the growth option declines in uncertainty. The results of the model provide necessary groundwork for better empirical identification of alternative expansion options in future international strategy research. They can also be used by executives to guide their foreign expansion decisions.

Temporary Resource Suspension and Erosion of Firm Capability

Jan-Michael Ross (Imperial College London, United Kingdom)

Toby Li (Texas A&M University, United States)

Ashton Hawk (University of Colorado, United States)

Jeffrey Reuer (University of Colorado, United States)

Discussant: Arkadiy Sakhartov ( University of Illinois at Urbana-Champaign, United States)

Why do some firms go into a temporary strategic retreat when facing demand uncertainty during an economic downswing, while others stay active? Although prior studies has investigated the roles of uncertainty and sunk costs, they rarely explore how potential strategic setbacks such as the erosion of firm capabilities can shape temporary suspension decisions. Building on the dynamic resource-based view (RBV) and real option theory (ROT), we argue that resource idling under uncertainty is influenced by the expected cost of recovering the pre-crisis capability level and the impact of switching between operating modes (i.e., non-idle, partial idle, complete idle) on the opportunity to take advantage of future growth opportunities. Using data on oil-drilling contractors in Texas between 2000 and 2016, we find that firms with inferior capabilities are more likely to partially idle drilling rigs whereas firms with superior capabilities are more likely to non-idle when facing demand uncertainty. We also show that resource idling shapes the development path of a driller’s core capability, putting a firm in a position of a competitive disadvantage when the industry recovers. By providing a novel linkage between RBV and ROT, our insights help explain unique patterns of managing resources in dynamic environments that hinge upon firms’ idiosyncratic capabilities.

Setting up an Energy Community: An Application in Northern Italy Photovoltaic Market

Marta Castellini (Università degli Studi di Brescia, FEEM, Italy)

Luca Di Corato (Ca’ Foscari University, Italy)

Michele Moretto (Università degli Studi di Padova, Italy)

Sergio Vergalli (Università degli Studi di Brescia FEEM, Italy)

Discussant: Toby Li (Texas A&M University, United States)

Our paper provides a theoretical real options framework for modeling prosumers’ investment decisions in photovoltaic plants in a Smart Grid context, when P2P exchange is possible and the two prosumers can be organized in an energy community. We focus on the optimal size of their photovoltaic plants and on the self-consumption profiles the prosumers must comply with to assure the demand and supply matching in P2P exchange. The model was calibrated on the Northern Italy energy market. We investigate the investment decision under different prosumers’ behaviors, taking into account all the possible combinations of their energy demand and supply. Our findings show that the existence of the energy community is not assured in all the cases we have focused on but depends on the shape and relationship between the supply and demand curves of the two prosumers. The best situation is when the two prosumers have an excess of supply and asymmetric and perfectly complementary demand curves. Sub-optimal cases occur when the P2P exchange and the sell to the national grid are exploited advantageously. This scenario is profitable if there is efficient cooperation between the two agents. Furthermore, prosumers invest in the highest capacity when they are characterized by different exchange P2P and self-consumption profiles, and they reach the maximum gain from the investment when the energy community is characterized by excess supply in exchange P2P.

Saturday Sept 4, 2021

Track II

Investment Capacity & Timing I

Chairperson: Maximilian Brill (University of Antwerp, Belgium)

Optimal Capacity and Investment Timing with a Production Cap

Roger Adkins (University of Bradford, United Kingdom)

Dean Paxson (University of Manchester, United Kingdom)

Discussant: Maximilian Brill (University of Antwerp, Belgium)

What is the optimal capacity and investment timing when there is a ceiling (cap) on capacity due to physical or economic constraints? What is the impact of the production cap on the capacity choice? We show the optimal timing with an inverse demand function with production cap model under unbreached, and breached conditions. There are novel results, with negative sensitivity to increases in demand uncertainty, and others that are not always intuitive.

Optimal Investment (Timing and Scale) in Flexible Combined Heat and Power (CHP) Generation

Dimitrios Zormpas (University of Brescia, Italy)

Giorgia Oggioni (University of Brescia, Italy)

Discussant: Dean Paxson (University of Manchester, United Kingdom)

We find the optimal investment timing and capacity of flexible combined heat and power (CHP) units. We show that flexibility guarantees earlier investment but has an ambiguous effect in terms of optimal capacity with respect to investments in standard CHP units. A numerical exercise using data from the pulp and paper industry concludes the paper.

Infrastructure Investment in Public Transport: An Option Game Analysis

Maximilian Brill (University of Antwerp, Belgium)

Bruno De Borger (University of Antwerp, Belgium)

Tine Compernolle (University of Antwerp, Belgium)

Peter Kort (Tilburg University, Netherlands)

Discussant: Dimitrios Zormpas (University of Brescia, Italy)

This paper investigates the investment in public transport infrastructure and service under the road capacity allocation dedicated to buses. Future demand is the main source of uncertainty and, to account for it properly, real options analysis is applied. The utilized real options model calculates the optimal bus frequency level and the optimal timing of investing by considering the monetary costs next to time costs, mainly congestion costs, of a public transport trip. Furthermore, the market structure is analyzed by investigating either a vertically integrated case, in which one decision maker holds the option to invest in the bus frequency and a dedicated bus lane at the same time or a vertically separated case, in which two decision makers are active and invest separately in the service and infrastructure. The infrastructure manager decides about investing in a dedicated bus lane first, and then the service provider invests in the bus frequency offered. A numerical example illustrates the effect of the market structure on the optimal results. The vertically integrated case is preferable, from a welfare perspective, than the vertically separated decision. Increasing congestion costs leads to earlier and smaller investment.

Saturday Sept 4, 2021

Track I

Strategic Investment & Games

Chairperson: Richard Ruble (Emlyon Business School, France)

Technology Adoption by Risk-averse Firms in a Cournot Duopoly

Besma Teffahi (Manouba University, Tunisia)

Walid Hichri (Lyon 2 University, France)

Discussant: Farzan Faninam (Tilburg University, Netherlands)

Most of the research on risk aversion does not take into account the structure of competition between firms, while most of the work analyzing competition is based on the assumption of risk neutrality. In this article, we develop a framework based on the mean-variance utility model introduced by Markowitz to examine the impact of risk aversion and uncertainty on the timing of optimal decisions to adopt new technologies by firms facing competition. we consider the case of two competing firms with different levels of risk aversion. The results show that in this context, the effect of uncertainty becomes stronger when risk aversion is introduced. When both firms have the same cost structure, we find that the firm with the lower risk aversion adopts the technology first. When the difference in marginal costs between the two firms is sufficiently small, a high-cost but less risk-averse company can dominate the market once demand reaches a certain level. Finally, we show that risk aversion can accelerate the adoption of new technologies, especially for companies that do not have the cost advantage.

The Dynamics of Preemptive and Follower Investments with Overlapping Ownership

Dimitrios Zormpas (University of Brescia, Italy)

Richard Ruble (Emlyon Business School & GATE CNRS, France)

Discussant: Besma Teffahi (Manouba University, Tunisia)

We study how overlapping ownership affects investments in a preemption race with market uncertainty. Internalization of rival payoffs delays follower entry if product market effects are moderate, implying longer incumbency which intensifies dynamic competition. Preemptive and follower investment thresholds increase with volatility as in standard real option models whereas firm value can decrease, and greater volatility makes internalization more profitable. From a welfare perspective there is a tradeoff between dynamic benefit and static costs of overlapping ownership. Whereas it is socially optimal not to have any overlapping ownership in some markets, at low volatility levels we find firms have an insufficient incentive to internalize.

Strategic Investment Under Uncertainty in a Triopoly Market

Farzan Faninam (Tilburg University, Netherlands)

Peter Kort (Tilburg University, Netherlands)

Kuno Huisman (Tilburg University, Netherlands)

Discussant: Dimitrios Zormpas (University of Brescia, Italy)

This paper analyzes investment decisions under uncertainty in a triopoly market. We determine the investment timing and the scale of investment of firms under the condition that firms hold a heterogenous cost structure. In a sense this paper combines Huisman and Kort, 2015 and Shibata, 2016. The former considers a duopoly market where the firms optimize their timing and capacity size to enter the market. Shibata, 2016, just concentrates on investment timing and finds for a triopoly market that the first investor is not always the lowest-cost firm in the market. Until now an economic interpretation is lacking. This paper provides an economic interpretation for Shibata’s result, based on the timing that the second investor preempts the third. To derive the optimal investment timing and the scale of investment, we apply real options methods. The investment timing and the capacity size of the firms are derived backwards. The aim of this extension is to generalize Shibata’s result in a model in which the firms not only determine investment timing but also the size of the investment.

Saturday Sept 4, 2021

Track II

Investment Capacity & Timing II

Chairperson: Motoh Tsujimura (Doshisha University, Japan)

Investment Timing and Optimal Capacity Choice with Price Floors and Ceilings

Dean Paxson (University of Manchester, United Kingdom)

Paulo J. Pereira (University of Porto, Portugal)

Artur Rodrigues (University of Minho, Portugal)

Discussant: Nick Huberts (University of York, United Kingdom)

What is the optimal capacity and investment timing when there is a price floor and ceiling? We adapt previous solutions for the value of an active firm with such a price collar, and provide a novel solution for an investment opportunity with simultaneous determination of optimal capacity and the price threshold that justifies immediate investment. We show that higher price caps reduce the thresholds and also the optimal capacity (surprisingly). However, higher price floors also reduce the thresholds, but eventually raise the optimal capacity (not surprising). Increased price volatility raises both the price threshold and the optimal capacity. Thus, a government wanting to motivate early investment, with large capacity to avoid congestion and crowding, could possibly achieve both objectives through appropriate price collars, but not through reducing volatility.

Capital Expansion and Contraction with Fixed and Proportional Costs and Irreversibility Risk

Motoh Tsujimura (Doshisha University, Japan)

Hidekazu Yoshioka (Shimane University, Japan)

Discussant: Dean Paxson (University of Manchester, United Kingdom)

This study examines a firm's capital expansion and reduction problem when the demand of output and the degree of irreversibility are stochastic. The firm controls the level of capital stock according to the demand of output, which is assumed to be governed by a geometric Brownian motion. When the firm expands the capital, it incurs capital purchase costs. In contrast, when the firm reduces the capital, the firm can sell the capital at a price lower than the purchase price. These prices are termed as the proportional cost in this study. The difference between these prices presents the irreversibility of capital investment. In this study, we consider the degree of irreversibility is governed by a Jacobi diffusion so that the degree moves between 0 and 1. Furthermore, we assume that changing the level of capital requires a fixed cost as well. The fixed cost represents the cost associated with investment decision-making, such as research costs. Thus, changing the level of capital requires the fixed and proportional costs. Therefore, the firm's problem is to decide when and how much to change the level of capital under output demand and irreversibility risk. To solve the problem, we formulate it as a stochastic impulse control problem.

The Impact of Economic Depreciation on Capital Investment Size, Timing and Social Welfare

Nick Huberts (University of York, United Kingdom)

Rafael Rossi Silveira (University of York, United Kingdom)

Discussant: Motoh Tsujimura (Doshisha University, Japan)

This paper identifies and analyzes the effects of the rate of economic deprecation of capital stock on a monopolist's investment problem in a dynamic and uncertain market environment, where continuous economic depreciation cannot be fully offset. We find that a higher rate of depreciation increases the investment trigger but can have mixed effects on the scale of investment. When investment is undertaken immediately, the monopolist has an incentive, relative to a zero-depreciation scenario, to preemptively increase its capital stock and counter losses in productive capacity for low (positive) rates of depreciation. For high rates, however, the reduced return on investment overtakes this incentive, leading to the firm investing less. Furthermore, the analysis on the interplay between the rate of depreciation and the level of uncertainty reveals that only high rates of depreciation can mitigate the impact of uncertainty on the real option's value, partially lifting the irreversibility constraint. The fact that the impact of economic depreciation on the firm's timing option and capacity decisions is level-dependent demonstrates that its consideration is not trivial.

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