Investment under uncertainty and irreversibility: Evidence from the shipping markets

Abstract

This paper investigates whether uncertainty and irreversibility affect new investments for high-value real assets. We examine ocean-going vessels and show that heightened uncertainty reduces both the likelihood of investment triggering and the magnitude of investment spending, conditional on triggering. These effects are more pronounced under an illiquid secondary ship market and a high price discount when reselling the vessel. We also show that uncertainty regarding the global economy and vessel-specific earnings affect the investment decision, but the amplifying effect of investment reversibility operates only through global economic uncertainty. Our work is novel as it models periods of investment inactivity and examines investors' behaviour across vessel segments.