Real Options and Endogenous Investment Costs: Evidence from Oil Rig Rates

34 Pages Posted: 8 Nov 2017 Last revised: 2 Apr 2018

See all articles by Zeigham Khokher

Zeigham Khokher

Tulane University

Mohammad Morovati

Khatam University

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Shyam Venkatesan

Ivey Business School, Western University

Date Written: March 2018

Abstract

We use a unique dataset on the utilization and the rental rates of offshore drilling rigs to test whether changes in uncertainty can result in changes in investment costs rather than in changes in investment levels. Our empirical analysis con firms that price uncertainty negatively affects rig rental rates. We do not, however, find a signi cant response of drilling activity to price uncertainty. The observed negative relation between price uncertainty and rig rental rates along with the absence of a relation between drilling activity and price uncertainty is consistent with a model where the supply of drilling rigs is inelastic.

Keywords: Real Options, Commodity Market

Suggested Citation

Khokher, Zeigham and Morovati, Mohammad and Titman, Sheridan and Venkatesan, Shyam Sunder, Real Options and Endogenous Investment Costs: Evidence from Oil Rig Rates (March 2018). Available at SSRN: https://ssrn.com/abstract=3066248 or http://dx.doi.org/10.2139/ssrn.3066248

Zeigham Khokher (Contact Author)

Tulane University ( email )

7 McAlister Drive
Tulane University
NEW ORLEANS, LA 70118
United States
504-865-5067 (Phone)

Mohammad Morovati

Khatam University ( email )

Tehran
Iran

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shyam Sunder Venkatesan

Ivey Business School, Western University ( email )

1151 Richmond St
London, Ontario N6A 3K7
Canada

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