DIVESTMENT AS A REAL OPTION: FIRM CHOICES UNDER CONDITIONS OF UNCERTAINTY

This study shifts the focus of real options theory from investment to divestment decisions. The key implications of the theory are developed and tested for business unit divestments as 'put' options on real assets. The results show that uncertainty in a business unit's environment is negatively related with the decision to divest. Further, this negative relationship remains when environmental uncertainty increases and disappears when environmental uncertainty falls. Together, these results suggest that firms' decisions to divest may be driven by option considerations when the environment of the business unit is uncertain.