A Real Options and Game-Theoretic Approach to Corporate Investment Strategy under Competition

Abstract

U An investment strategy encompasses a sequence of tac-tical investment projects, of which several may yield a low relum when considered in i.solation. Often the value of such an investment consists ofthe option to invest in the future growth of the finn. Eor example, the value of a pilot project or an R&D investment does not derive so much from the expecied cash inflows., but rather from the option to invest in future commercial exploitation. Standard fore-casting of the expected cash inllows implicitly assumes investing in the follow-up project. Therefore, the tradi-tional discounted cash flow (DCE) method has serious shortcomings in analyzing projects when infonnation con-cernini; future investment decisions is not yet known. The We are indebted to Lenos Trigeorgis, Winfried Hallerbach, Tony Bouw-man. I ienk Berkman. Miehiel Zwijnenbuig and two anonymous referees