Testing the option value theory of irreversible investment

This article statistically tests the option theory of irreversible investme nt. Using contingent claims valuation, we derive the value of options to in vest in capacity, where the projects are endogenous to the economic circums tances prevailing at the investment date. We then test whether decisions ma de by Canadian copper mines are compatible with the trigger price implied b y the theory. Our model explains investment size and timing satisfactorily from a statistical and an economic point of view; simulations with a mean-r everting process suggest that the results do not depend crucially on the;as sumption that price follows a geometric Brownian motion.