Managerial Flexibility, Uncertainty, and Corporate Investment: The Real Options Effect

37 Pages Posted: 17 Mar 2006

See all articles by K.C. John Wei

K.C. John Wei

Hong Kong Polytechnic University

Feixue Xie

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance

Date Written: February 28, 2006

Abstract

This study examines how uncertainty affects corporate capital investment and how managerial flexibility influences this effect. Our evidence is consistent with the prediction of real options theory on investment. Specifically, we find that firms that face more uncertain future environment generally reduce their current investment expenditures after controlling for investment opportunities and fund availability. We refer this phenomenon as the real options effect on corporate investment. Furthermore, our evidence shows that the real options effect is stronger for firms with greater managerial flexibility. That is, the real options effect is more pronounced for firms with fewer financing constraints, larger size, and greater investment opportunities.

Keywords: Managerial Flexibility, Uncertainty, Corporate Investment, Real Options

Suggested Citation

Wei, Kuo-Chiang (John) and Xie, Feixue, Managerial Flexibility, Uncertainty, and Corporate Investment: The Real Options Effect (February 28, 2006). Available at SSRN: https://ssrn.com/abstract=891559 or http://dx.doi.org/10.2139/ssrn.891559

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Feixue Xie (Contact Author)

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance ( email )

500 W. University Ave.
El Paso, TX 79968
United States
915-747-7788 (Phone)
915-747-6268 (Fax)

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