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When can pessimism add value? How real option disinvestment flexibility augments project NPV

Research output: Working paper

Published
Publication date2002
Place of PublicationLancaster University
PublisherThe Department of Accounting and Finance
Original languageEnglish

Publication series

NameAccounting and Finance Working Paper Series

Abstract

In this article by drawing together existing option pricing models we demonstrate how different degrees of managerial flexability can affect the value of a project. In particular we also include new option pricing results that allow us to properly take into account a firms exit option. Our paper illustrates that these disinvestment options can be valuable suggesting that managerial pessimism (i.e. consideration of outcomes if the project does not perform) can add value.