This paper analyzes the optimal investment decisions of heterogeneous firms in a competitive, uncertain environment. We characterize firms’ optimal investment strategy explicitly, and derive a closed form solution for firm value. We show that in the strategic equilibrium real option premia are significant. As a result firms delay investment, choosing optimally not to undertake some positive NPV projects. The model predicts that firm returns vary over the business cycle, with returns negatively skewed during expansions but positively skewed in recessions
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