Option to Abandon and Investment Return

21 Pages Posted: 24 Oct 2017 Last revised: 18 Jan 2018

See all articles by Suman Banerjee

Suman Banerjee

Stevens Institute of Technology; Stevens Institute of Technology

Thorsten Janus

University of Wyoming

Date Written: September 7, 2017

Abstract

We analyze returns to lumpy projects with multiple investors. Since each investor's commitment increases the likelihood of project completion it exerts a positive externality on other investors. We show that due to this externality either a rise in the cost of abandoning the project or decreased volatility of returns to abandonment can increase ex-ante returns. These findings provide exceptions to the standard results that investment irreversibility (high abandonment costs) decreases returns and option volatility increases returns. Finally, we show that the optimal number of investors is either large or very small.

Keywords: Abandonment Option, Lumpy Projects, Return on investment, Firm performance

JEL Classification: G23, G32, G34

Suggested Citation

Banerjee, Suman and Janus, Thorsten, Option to Abandon and Investment Return (September 7, 2017). Stevens Institute of Technology School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=3057803 or http://dx.doi.org/10.2139/ssrn.3057803

Suman Banerjee (Contact Author)

Stevens Institute of Technology ( email )

525 River Street
Hoboken, NJ 07030
United States
2012613689 (Phone)

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

Thorsten Janus

University of Wyoming ( email )

Box 3434 University Station
Laramie, WY 82070
United States

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