Working Paper: NBER ID: w25624
Authors: Paul Dcaire; Erik P. Gilje; Jrme P. Taillard
Abstract: 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.
Keywords: Real options; Peer effects; Information externalities; Natural gas investment
JEL Codes: G30; G31; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Experience of peers in drilling shale infill projects (L71) | Firm's decision to exercise its own options (D25) |
| Adjacent exercise activity (Y80) | Insights into optimal drilling depths and techniques (L71) |
| Peer influence (C92) | Exercise of real options (D25) |
| Peer exercise behavior (C92) | Firm's decision to exercise its own options (D25) |
| Adjacent peer project exercise activity (Y80) | Firm's decision to exercise its own options (D25) |