Revisiting corporate growth options in the presence of state-dependent cashflow risk
Given a non-trivial market price of risk, we study the impact of state-dependent cashflow risk on the optimal investment policy and on the ensuing value of an unlevered firm that holds the option of scaling up cashflows from its assets in place upon incurring an irreversible cost. The firms investment decision and value are studied as a function of the market price of risk and of the degree of state dependence in cashflow risk.
corporate growth options market price of risk state-dependent risk stock pricing