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The Role of the Abandonment Option in Strategic Capital Allocation: A Review of Selected Literature

JOÃO ADELINO RIBEIRO ^a , JOÃO COSTA-FILHO ^b

^a Universidade Autónoma de Lisboa, ISCAL – IPL and CICEE – Research Center in Business and Economics; ^b UECE – Research Unit on Complexity and Economics, REM – Research on Economics and Mathematics, ISEG – Universidade de Lisboa, Portugal

To cite this article:

Ribeiro, J. A. & J. Costa-Filho. 2022. The Role of the Abandonment Option in Strategic Capital Allocation: A Review of Selected Literature. European Review of Business Economics I(2): 29-58.

DOI: https://doi.org/10.26619/ERBE-2021.I.2.2

Received: 27 October 2021. Accepted 18 February 2022. Published: 30June 2022

Language: English

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Abstract

We review the most relevant contributions to the abandonment option since the late 1960s. We begin by approaching the contributions to the literature before the emergence of the real options approach to capital investment decisions, and thereafter, under a consistent real options approach, highlighting the interactions between the option to abandon and other types of options. We then identify the methodologies adopted, and the business sectors/ types of investment projects where the abandonment option is more frequently studied. We also debate the strategic role of the abandonment solution in corporate divestitures and under a game-theoretical approach. Finally, we present some concluding remarks and identify how certain gaps found in the literature may constitute opportunities for future research.

Keywords

Real Options; Abandonment Option; Investment Projects; Resource Allocation; Divestitures; Strategic Decisions. Real Options Games.

JEL Codes: D81; G31.

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