TY  - JOUR
AU  - Abel,Andrew B.
AU  - Dixit,Avinash K.
AU  - Eberly,Janice C.
AU  - Pindyck,Robert S.
TI  - Options, the Value of Capital, and Investment
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5227
PY  - 1996
Y2  - November 1996
UR  - http://www.nber.org/papers/w5227
L1  - http://www.nber.org/papers/w5227.pdf
N1  - Author contact info:
Andrew B. Abel
Wharton School
University of Pennsylvania
2315 Steinberg Hall - Dietrich Hall
Philadelphia, PA  19104-6367
Tel: 215/898-4801
Fax: 215/573-7244
E-Mail: abel@wharton.upenn.edu

Avinash Dixit
Department of Economics
Princeton University
Princeton, NJ  08544-1017
E-Mail: dixitak@princeton.edu

Janice C. Eberly
Northwestern University
Department of Finance
Kellogg School of Management
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/467-1840
Fax: 847/491-5719
E-Mail: eberly@kellogg.northwestern.edu

Robert S. Pindyck
MIT Sloan School of Management
100 Main Street, E62-522
Cambridge, MA  02142
Tel: 617/253-6641
Fax: 617/258-6855
E-Mail: RPINDYCK@MIT.EDU
AB  - Capital investment decisions must recognize the limitations on the firm's ability later to sell off or expand capacity.  This paper shows how opportunities for future expansion or contraction can be valued as options, how this valuation relates to the q-theory of investment, and how these options affect 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 interact to determine the effect of uncertainty on investment, how these option values change in response to shifts of the distribution of future profitability, and how the q-theory and option pricing approaches to investment are related.
ER  -