Sunk costs, uncertainty and market exit: A real options perspective

Abstract

In this article, we examine whether the option value of keeping an operation alive will deter firms from exiting an industry. We find that uncertainty dissuades firms from exiting an industry, but only when the sunk costs of entering and exiting that industry are sizeable. Moreover, we argue and find that sunk costs can be influenced by the technological intensity of an industry, by the extent to which a firm competes on the basis of innovation, and by the firm's diversification strategy.