Uncertainty, Real Options, and Cost Behavior: Evidence from Washington State Hospitals

18 Pages Posted: 8 May 2006

See all articles by Sanjay Kallapur

Sanjay Kallapur

Indian School of Business

Leslie Eldenburg

University of Arizona

Multiple version iconThere are 2 versions of this paper

Date Written: 2005-06-12

Abstract

This study tests an implication of the real-options theory of investment, that uncertainty leads firms to prefer technologies with low fixed and high variable costs. In 1983, a change in Medicare reimbursement increased the uncertainty of revenues for hospitals. Using a sample of 831 departments in 59 Washington State hospitals over the 19771994 period, we find that the ratio of variable to total costs increased after 1983. This increase is not attributable to a gradual increase in the ratio over time: We estimate a significant increase after 1983 even after controlling for a time trend. Further, we find a greater increase in the variable-to-total cost ratio for hospitals that had higher percentages of Medicare patients, increasing our confidence in the conclusion that the change in cost behavior is attributable to Medicare`s change in reimbursement.

Suggested Citation

Kallapur, Sanjay and Eldenburg, Leslie G., Uncertainty, Real Options, and Cost Behavior: Evidence from Washington State Hospitals (2005-06-12). Journal of Accounting Research, Vol. 43, pp. 735-752, December 2005. Available at SSRN: https://ssrn.com/abstract=876687 or http://dx.doi.org/10.1111/j.1475-679X.2005.00188.x

Sanjay Kallapur (Contact Author)

Indian School of Business ( email )

ISB Campus, Gachibowli
Hyderabad, 500 032
India
+91 40 2318 7138 (Phone)

Leslie G. Eldenburg

University of Arizona ( email )

McClelland Hall Room 301H
Tucson, AZ 85721
United States
520-621-4585 (Phone)
520-621-3742 (Fax)

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