The effects of time-to-build and regulation on investment timing and size

Abstract

This study investigates the effects of the delay of revenue generation on a firm’s investment timing and size decisions. Time-to-build and regulation are considered as internal and external factors that impede the firm’s instant revenue generation, respectively. We show that in the absence of regulation, uncertainty in time-to-build always advances the timing of investment; however, the capacity size is independent of time-to-build. We also show that in the absence of time-to-build, the presence of regulation increases the expected capacity size and the uncertainty of regulation amplifies this effect. When both time-to-build and regulation exist, uncertainty in the delay of revenue generation by the two factors can advance the investment timing and increase the size, improving firm value.