Sing, T-F (2002) Irreversibility and uncertainty in property investment. Journal of Financial Management of Property and Construction, 7(1), pp. 17-29. ISSN 1366-4387
Abstract
Irreversibility is a fundamental concept underpinning the real options (contingent claim) methodology. This paper uses a one-factor contingent claim model to demonstrate the significance of the optimal timing of property investment and examine the irreversibility implications on the optimal investment decision. It is shown that when uncertainty of future return increases, the value of option to wait to invest increases correspondingly. It is thus better to keep the investment option alive rather than exercising it. Hence, the level of investment declines in a highly volatile market. Contrary to Tobin’s q theory of investment, our numerical results show that it is only optimal to invest if the project value exceeds the opportunity cost by an average of 1.5 times. Investors expect an additional premium from the investment to offset the opportunity loss for giving up the option to wait for more information.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | irreversibility, real options, optimal timing, property investment |
| Index terms: | investor, real option, option, investment decision, property investment, methodology |
| Subjects: | decision analysis, sociology, economic analysis, research methods |
| Topics: | Procurement, Risk Management, Research Practice, Business Strategy, Stakeholder Management |
| Descriptive scope: | 3 PCT |
N.B. Descriptive scope is a count of how many of the five facets of empirical research are indicated by the words used in title, abstract and keywords. It is not intended as a judgement on the research; merely a count of the kind of word we would expect to indicate Phenomenon, Concepts, Theoretical framing, Empirical techniques, Analytical techniques. If all five are present, then a code of “5 PCTEA” will indicate this. If you feel the coding for this record is questionable, we welcome discussion around the terms we matched or the way we categorized them. The facet you would expect may not be coded, or a facet may be coded inappropriately. This can also bear on a larger question, of which facets should be treated as defining in construction management research. Please get in touch, and we will look at it. More details here