'Time to Build, Option Value and Investment Decisions': A Comment

Posted: 21 Jun 2001

See all articles by Alistair Milne

Alistair Milne

Loughborough University - School of Business and Economics

A. Elizabeth Whalley

University of Warwick - Finance Group

Abstract

We correct the analysis of the model of time to build in Majd and Pindyck (1987 Journal of Financial Economics 18, 7-27) for the omission of an essential optimality condition. Our analysis reveals an additional insight: long times to build reduce the effects of increased project value volatility (i.e., higher investment thresholds) in comparison to standard real option models of investment under uncertainty, where investment is instantaneous. Thus, a 'naive' NPV rule can sometimes be an appropriate initial guide to investment.

Keywords: Irreversible investment; Time to build

JEL Classification: C63, D92

Suggested Citation

Milne, Alistair K. L. and Whalley, A. Elizabeth, 'Time to Build, Option Value and Investment Decisions': A Comment. Journal of Financial Economics, Vol. 56, No. 2, May 1, 2000, Cass Business School Research Paper, WBS Finance Group Research Paper No. 7, Available at SSRN: https://ssrn.com/abstract=251506

Alistair K. L. Milne

Loughborough University - School of Business and Economics ( email )

Epinal Way
Loughborough
Leicestershire, LE11 3TU
United Kingdom

A. Elizabeth Whalley (Contact Author)

University of Warwick - Finance Group ( email )

Warwick Business School
University of Warwick
Coventry, CV4 7AL
Great Britain

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