Under the standard real options approach to investment under uncertainty, agents formulate optimal exercise strategies in isolation and ignore competitive interactions. However, in many real-world asset markets, exercise strategies cannot be determined separately, but must be formed as part of a strategic equilibrium. This article provides a tractable approach for deriving equilibrium investment strategies in a continuous-time Cournot–Nash framework. The impact of competition on exercise strategies is dramatic. For example, while standard real options models emphasize that a valuable “option to wait ” leads firms to invest only at large positive net present values, the impact of competition drastically erodes the value of the option to wait and leads to investment at very near the zero net present value threshold. The real options approach to analyzing investment under uncertainty has become part of the mainstream literature of financial economics. The real options approach to investment now typically comprises an entire chapter in corporate finance textbooks [see, e.g., Brealey and Myers (2000) and Van Horne (1998)]. Essentially the real options approach posits that the oppor-tunity to invest in a project is analogous to an American call option on the investment opportunity. Once that analogy is made, the vast and rigorous machinery of financial options theory is at the disposal of real investment analysis. The real options approach is well summarized in Dixit and Pindyck (1994) and Trigeorgis (1996).1 A feature that the vast majority of real options articles have in common is the lack of strategic interaction across option holders. Investment (exercise) strategies are formulated in isolation, without regard to the potential impact of other firms ’ exercise strategies. The standard starting point for such models is an exogenous process for underlying asset values (e.g., the stock price in

In most models of market microstructure tractability requires that all market participants know the number (and presence) of competing insiders. I drop this assumption in experimental asset markets. Outcomes are qualitatively consistent with theoretical models when the number of insiders is disclosed prior to trade. When it is not, insiders use the timing and size of trades interactively to hide from the dealers and each other, dealers have difficulty identifying insider trades, and liquidity patterns do not differ as a function of the number of insiders. In general, insider behavior has strategic dimensions not admitted in Kyle (1985) and extensions.

In most models of market microstructure tractability requires that all market participants know the number (and presence) of competing insiders. I drop this assumption in experimental asset markets. Outcomes are qualitatively consistent with theoretical models when the number of insiders is disclosed prior to trade. When it is not, insiders use the timing and size of trades interactively to hide from the dealers and each other, dealers have difficulty identifying insider trades, and liquidity patterns do not differ as a function of the number of insiders. In general, insider behavior has strategic dimensions not admitted in Kyle (1985) and extensions.

Under the standard real options approach to investment under uncertainty, agents formulate optimal exercise strategies in isolation and ignore competitive interactions. However, in many real-world asset markets, exercise strategies cannot be determined separately, but must be formed as part of a strategic equilibrium. This article provides a tractable approach for deriving equilibrium investment strategies in a continuous-time Cournot-Nash framework. The impact of competition on exercise strategies is dramatic. For example, while standard real options models emphasize that a valuable "option to wait" leads firms to invest only at large positive net present values, the impact of competition drastically erodes the value of the option to wait and leads to investment at very near the zero net present value threshold.

One of the puzzles regarding initial public offerings (IPOs) is that issuers rarely get upset about leaving substantial amounts of money on the table, defined as the number of shares sold times the difference between the first-day closing market price and the offer price. The average IPO leaves $9.1 million on the table. This number is approximately twice as large as the fees paid to investment bankers and represents a substantial indirect cost to the issuing firm. We present a prospect theory model that focuses on the covariance of the money left on the table and wealth changes. Our reasoning also provides an explanation for a second puzzling pattern: much more money is left on the table following recent market rises than after market falls. This results in an explanation of hot issue markets. We also offer a new explanation for why IPOs are underpriced.

Confirming predictions shared by the trade-off and pecking order models, more profitable firms and firms with fewer investments have higher dividend payouts. Confirming the pecking order model but contradicting the trade-off model, more profitable firms are less levered. Firms with more investments have less market leverage, which is consistent with the trade-off model and a complex pecking order model. Firms with more investments have lower long-term dividend payouts, but dividends do not vary to accommodate short-term variation in investment. As the pecking order model predicts, short-term variation in investment and earnings is mostly absorbed by debt.

Journal Article Testing Trade-Off and Pecking Order Predictions About Dividends and Debt Get access Eugene F. Fama, Eugene F. Fama University of Chicago Address correspondence to Eugene F. Fama, Graduate School of Business, University of Chicago, 1101 East 58th St., Chicago, IL 60637, or e-mail: [email protected]. Search for other works by this author on: Oxford Academic Google Scholar Kenneth R. French Kenneth R. French Dartmouth College Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 15, Issue 1, January 2002, Pages 1–33, https://doi.org/10.1093/rfs/15.1.1 Published: 16 June 2015

One of the puzzles regarding initial public offerings (IPOs) is that issuers rarely get upset about leaving substantial amounts of money on the table, defined as the number of shares sold times the difference between the first-day closing market price and the offer price. The average IPO leaves $9.1 million on the table. This number is approximately twice as large as the fees paid to investment bankers and represents a substantial indirect cost to the issuing firm. We present a prospect theory model that focuses on the covariance of the money left on the table and wealth changes. Our reasoning also provides an explanation for a second puzzling pattern: much more money is left on the table following recent market rises than after market falls. This results in an explanation of hot issue markets. We also offer a new explanation for why IPOs are underpriced.