Contrasts Between Types of Assets in Fixed Investment Equations as a Way of Testing Real Options Theory

摘要

This article tests the power of real options theory to explain investment under uncertainty, exploiting differences in the degrees of irreversibility and expandability between machinery and buildings. It reports estimates of investment equations for each asset class using a large sample of U.K. manufacturing industries, with results that are consistent with the predictions of real options theory. In addition, using a specially constructed industry-specific measure of irreversibility for machinery investment, the article provides further confirmation of the empirical relevance of real options.