Sunk Costs, Uncertainty and Market Exit: A Real Options Perspective

Posted: 5 Oct 2009

See all articles by Jonathan Paul O'Brien

Jonathan Paul O'Brien

University College Dublin (UCD)

Timothy B. Folta

Purdue University - Krannert School of Management

Date Written: October 2009

Abstract

In this article, we examine whether the option value of keeping an operation alive will deter firms from exiting an industry. We find that uncertainty dissuades firms from exiting an industry, but only when the sunk costs of entering and exiting that industry are sizeable. Moreover, we argue and find that sunk costs can be influenced by the technological intensity of an industry, by the extent to which a firm competes on the basis of innovation, and by the firm's diversification strategy.

Suggested Citation

O'Brien, Jonathan Paul and Folta, Timothy B., Sunk Costs, Uncertainty and Market Exit: A Real Options Perspective (October 2009). Industrial and Corporate Change, Vol. 18, Issue 5, pp. 807-833, 2009. Available at SSRN: https://ssrn.com/abstract=1481585 or http://dx.doi.org/dtp014

Jonathan Paul O'Brien (Contact Author)

University College Dublin (UCD) ( email )

Belfield, Dublin 4 4
Ireland

Timothy B. Folta

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
765-494-9252 (Phone)

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