Does the Value of Managerial Flexibility Always Increase with Uncertainty

Being able to choose the timing of investment projects is an important form of managerial flexibility. We analyze the value of such intertemporal flexibility by considering the investment decision of a firm that may complete a project either in one lump or in multiple stages at distinct points in time. The firm faces a trade-off between the cost savings that arise when the project is completed in one go and the additional flexibility that arises when the firm is able to respond to resolving uncertainty by choosing optimal timing individually for each stage. We show that, contrary to a careless interpretation of the real option theory, higher uncertainty makes the lumpy investment more attractive relative to the apparently more flexible alternative of completing the investment in stages.