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Competition and the Bad News Principle in a Real Options Framework

Author

Listed:
  • Katsumasa Nishide

    (Department of Economics, Yokohama National University)

  • Kyoko Yagi

    (Department of Management Science and Engineering, Akita Prefectural University)

Abstract
We study the investment timing problem where two firms that compete for investment preemption know in advance the time at which the economic condition changes. We show that the so-called Bad News Principle applies to the leader firm’s investment decision near maturity in many cases. This result indicates that the option value to wait does have an impact even in a competitive situation, which is in contrast to the previous literature.

Suggested Citation

  • Katsumasa Nishide & Kyoko Yagi, 2013. "Competition and the Bad News Principle in a Real Options Framework," KIER Working Papers 860, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:860
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP860.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Bad news principle; investment timing; competition; real options;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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