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Options, the Value of Capital, and Investment
Abstract
Capital investment decisions must recognize the limitations on the firm's ability to later sell or expand capacity. This paper shows how opportunities for future expansion or contraction can be valued as options, how their valuation relates to the q theory of investment, and their effect on the incentive to invest. Generally, the option to expand reduces the incentive to invest, while the option to disinvest raises it. We show how these options determine the effect of uncertainty on investment, how they are changed by shifts of the distribution of future profitability, and how the q-theory and option pricing approaches are related.
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Citations
Cited by
Optimal Investment with Costly Reversibility
Abel, A. B., & Eberly, J. C. (1996) · The Review of Economic Studies · doi:10.2307/2297794 · Cited by 600
Self-citationPÁSTOR, Ľ., & VERONESI, P. (2005) · The Journal of Finance · doi:10.1111/j.1540-6261.2005.00778.x · Cited by 420
Capital Allocation and Timely Accounting Recognition of Economic Losses
Bushman, R. M., Piotroski, J. D., & Smith, A. J. (2011) · Journal of Business Finance & Accounting · doi:10.1111/j.1468-5957.2010.02231.x · Cited by 345
Entry in the presence of dueling options
Folta, T. B., & O'Brien, J. P. (2004) · Strategic Management Journal · doi:10.1002/smj.368 · Cited by 320
Employment Protection, Investment, and Firm Growth
Bai, J. (., Fairhurst, D., & Serfling, M. (2020) · The Review of Financial Studies · doi:10.1093/rfs/hhz066 · Cited by 282
Metadata
- Authors
- Abel, A. B., Dixit, A. K., Eberly, J. C., & Pindyck, R. S.
- Venue
- The Quarterly Journal of Economics
- Publisher
- Oxford University Press (OUP)
- Published
- 1996-08-01
- Volume
- 111
- Issue
- 3
- Pages
- 753-777
- ISSN
- 0033-5533 (ISSN-L)
- 1531-4650
- OpenAlex
- W2147154990
- Cited by
- 480
- References
- 0
- FWCI
- 27.17
- Type
- journal article
- Language
- en
- Open access
- closed
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- CoChat. (2026). Citation check: Options, the Value of Capital, and Investment. https://app.cochat.ai/papers/10.2307/2946671
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- Abel, A. B., Dixit, A. K., Eberly, J. C., & Pindyck, R. S. (1996). Options, the Value of Capital, and Investment. The Quarterly Journal of Economics. https://doi.org/10.2307/2946671
Data sources
Bibliographic data: Semantic Scholar, OpenAlex, Crossref.
Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
