Real Option Exercise: Empirical Evidence

Paul Décaire, Erik P. Gilje, Jérôme P. Taillard

NBER Working Paper No. 25624
Issued in February 2019
NBER Program(s):Corporate Finance

We study when and why firms exercise real options. Using detailed project-level investment data, we find that the likelihood that a firm exercises a real option is strongly related to peer exercise behavior. Peer exercise decisions are as important in explaining exercise behavior as variables commonly associated with standard real option theories, such as volatility. We identify peer effects using localized exogenous variation in peer project exercise decisions and find evidence consistent with information externalities being important for exercise behavior.

Supplementary materials for this paper:

• online appendix

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w25624

Published: Paul H Décaire & Erik P Gilje & Jérôme P Taillard & Stijn Van Nieuwerburgh, 2020. "Real Option Exercise: Empirical Evidence," The Review of Financial Studies, vol 33(7), pages 3250-3306.