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Optimal exercise of jointly held real options: a Nash bargaining approach with value diversion

Research output: Contribution to Journal/MagazineJournal articlepeer-review

<mark>Journal publication date</mark>1/12/2014
<mark>Journal</mark>European Journal of Operational Research
Issue number2
Number of pages14
Pages (from-to)565–578
Publication StatusPublished
Early online date17/06/14
<mark>Original language</mark>English


This paper provides a two-stage decision framework in which two or more parties exercise a jointly held real option. We show that a single party’s timing decision is always socially efficient if it precedes bargaining on the terms of sharing. However, if the sharing rule is agreed before the exercise timing decision is made, then socially optimal timing is attained only if there is a cash payment element in the division of surplus. If the party that chooses the exercise timing can divert value from the project, then the first-best outcome may not be possible at all and the second-best outcome may be implemented using a contract that is generally not optimal in the former cases. Our framework contributes to the understanding of a range of empirical regularities in corporate and entrepreneurial finance.