The Value of Green Energy: Optimal Investment in Mutually Exclusive Projects and Operating Leverage

Jerome Detemple, Yerkin Kitapbayev

Research output: Contribution to journalArticlepeer-review

9 Scopus citations

Abstract

We study investments in exclusive projects with different cost structures. Our analysis incorporates the possibility of producing a stochastic revenue stream from two alternative technologies with a stochastic variable cost and a fixed cost, respectively, and accounts for project managers' endogenous operating decisions. The optimal investment decision is characterized by two possibly nonmonotone boundaries. We examine the effect of operating leverage on managerial policies, investment decisions, and values and carry out an application to power generation projects. We assess the impact of knowledge acquisition, that is, investments in growth options.

Original languageBritish English
Pages (from-to)3307-3347
Number of pages41
JournalReview of Financial Studies
Volume33
Issue number7
DOIs
StatePublished - 1 Jul 2020

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