this paper, we study a well-known real option: the opening and closing of mines. Using a new database that tracks the annual opening and closing decisions of 285 developed North American gold mines in the period 1988-1997, we confirm many of the predictions from real options models. As predicted, the empirical results demonstrate that the probability that a mine is open is related to market-wide factors (including the level and volatility of the gold price and the interest rate) as well as to mine-specific factors (including the mine's fixed costs, variable costs, and reserves.) These results are both statistically significant and economically material. There is strong evidence of hysteresis, which would result from non-zero opening and closing costs. Together, the data provide strong support for the real options model as a useful model to describe and predict a mine's opening and shutting decisions. In addition, we find that the decision whether to shut a mine is related to firm-specific managerial factors not normally considered within a strict real options model, most notably the profitability of other mines in the firm's portfolio and of the firm's other businesses. These relationships do not seem to be based on geographic synergies and we suspect they are an indication of capital allocation processes within these firms.

ABSTRACT This paper describes and analyses the history of the fundamental equation of modern financial economics: the Black-Scholes (or Black-Scholes-Merton) option pricing equation. In that history, several themes of potentially general importance are revealed. First, the key mathematical work was not rule-following but bricolage, creative tinkering. Second, it was, however, bricolage guided by the goal of finding a solution to the problem of option pricing analogous to existing exemplary solutions, notably the Capital Asset Pricing Model, which had successfully been applied to stock prices. Third, the central strands of work on option pricing, although all recognizably ‘orthodox ’ economics, were not unitary. There was significant theoretical disagreement amongst the pioneers of option pricing theory; this disagreement, paradoxically, turns out to be a strength of the theory. Fourth, option pricing theory has been performative. Rather than simply describing a preexisting empirical state of affairs, it altered the world, in general in a way that made itself more true.

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Capital budgeting in a situation with variable utilisation of capacity –