Uncertainty, irreversibility, and the likelihood of entry: An empirical assessment of the option to defer

Recent work in the real options approach to investment has argued that firms face significant opportunity costs when entry costs are largely irreversible, and these costs equal the value of an option to defer investment. This study seeks to examine empirically these claims by investigating the interactive effects of uncertainty and irreversibility on the likelihood of entry into new business by diversified firms. We investigate both industry and firm-specific factors influencing the degree of investment irreversibility. In general, we find support for the notion that real option value affects the likelihood of entry.