The role of the abandonment option in strategic capital allocation: a review of selected literature

Abstract

We review the most relevant contributions to the abandonment option since the late 1960s. We begin by approaching the contributions to the literature before the emergence of the real options approach to capital investment decisions, and thereafter, under a consistent real options approach, highlighting the interactions between the option to abandon and other types of options. We then identify the methodologies adopted, and the business sectors/ types of investment projects where the abandonment option is more frequently studied. We also debate the strategic role of the abandonment solution in corporate divestitures and under a game-theoretical approach. Finally, we present some concluding remarks and identify how certain gaps found in the literature may constitute opportunities for future research.