An Empirical Examination of the Relationship Between Real Options Values and the Rate of Investment

This paper examines the relationship between uncertainty and investment decisions by food andnon-food firms. Using hysteresis and the real options paradigm, we review why uncertaintymight cause firms to delay investment. In particular, our model looks for a negative relationshipbetween capital invested and uncertainty. In the alternative, if the relationship is positive, thismay be consistent with the exercise of growth options or competitive markets. Empirical resultsare mixed. In one of the four models we present there is clear evidence of hysteresis, that is anegative relationship between year over year investment and uncertainty. The remaining 3 modelsindicate the opposite, a positive relationship between investment and risk. Although themodels differ, the first model is the stronger of the three. Nonetheless, the results are ambiguous.Although we use a large cross sectional, time series panel set of data, we find nothing remarkableabout the food industry per se, except that across industries, their level of investment is aboutin the middle.