Group-Managed Real Options

2021 ◽  
Author(s):  
Lorenzo Garlappi ◽  
Ron Giammarino ◽  
Ali Lazrak
Keyword(s):  
Real Options ◽  
Real Option ◽  
Single Agent ◽  
Group Behavior ◽  
Heterogeneous Beliefs ◽  
Sequential Decisions ◽  
Belief Polarization ◽  
Timing Decisions ◽  
Group Delays

Abstract We study a standard real-option problem in which sequential decisions are made through voting by a group of members with heterogeneous beliefs. We show that, when facing both investment and abandonment timing decisions, the group behavior cannot be replicated by that of a representative “median” member. As a result, members’ disagreement generates inertia—the group delays investment relative to a single-agent case—and underinvestment—the group rejects projects that are supported by a majority of members, acting in autarky. These coordination frictions hold in groups of any size, for general voting protocols, and are exacerbated by belief polarization.

Project portfolio valuation using real options

2020 ◽  
Vol 13 (2) ◽  
pp. 126-146
Author(s):  
A.B. Lanchakov ◽  
S.A. Filin ◽  
A.Zh. Yakushev
Keyword(s):  
Real Options ◽  
Real Option ◽  
Project Portfolio ◽  
Risk And Uncertainty ◽  
Expected Effect ◽  
Investment Projects ◽  
Financial Options ◽  
Portfolio Efficiency ◽  
The Face ◽  
Effective Development

Subject. The article analyzes the expected effect of a portfolio of projects in the face of risk and uncertainty, when using real options. Objectives. The purpose is to offer a more objective formula to assess the expected impact of a portfolio of projects for real investment objects under risk and uncertainty, using real options, and provide recommendations for improving the portfolio efficiency. Methods. The study draws on methods of real options and evaluation of investment projects through the real option value, the cash flow discounting method, synthesis, and mathematical modeling. Results. We systematized the main types of real options and developed a formula for calculating the expected effect of project portfolio implementation. The said formula shows that considering the additional long-term costs embedded in a portfolio of real options, which are associated with the use of these real options, and, therefore, reducing the overall risk of projects and the entire portfolio, permit to improve the objectivity of such calculations. Conclusions. When analyzing real options that have real assets as underlying instruments, it is often impossible to apply the computational formulae for financial options, as they differ significantly. The systematization of the main types of real options helps expand the range of application of management solutions. The offered formula enables to improve the efficiency of project insurance under risk and uncertainty and to use additional opportunities for effective development of the company.

Research on the Real Options in Investment Decision of Waterway Infrastructure Construction

2013 ◽  
Vol 734-737 ◽  
pp. 1617-1620
Author(s):  
Wei Jin
Keyword(s):  
Real Options ◽  
Carbon Dioxide Emissions ◽  
Capital Investment ◽  
Real Option ◽  
Investment Decision ◽  
Energy Utilization ◽  
Real Options Theory ◽  
The Real ◽  
The Government ◽  
Real Option Method

Developing the waterway infrastructure construction can improve the efficiency of energy utilization, reduce the energy consumption intensity and carbon dioxide emissions. Till the year 2020, China plan to complete 19,000 kilometers high grade channel. Construction of water infrastructure construction requires a large capital investment. However, the main financial source of funding the construction of transportation infrastructure at present in China is special financial allocation of the government. The unitary financing structure as well as the funding pressure has leaded to some serious financing problems. This paper applied the real options theory to the waterway infrastructure construction financing, analyzed the limitations of the NPV method and the advantages of real option method in investment decision of waterway infrastructure construction, and took an example to show its feasibility.

scholarly journals A real option approach for the valuation of switching output flexibility in residential property investment

2018 ◽  
Vol 23 (2) ◽  
pp. 133-151 ◽  
Author(s):  
Kwabena Mintah ◽  
David Higgins ◽  
Judith Callanan
Keyword(s):  
Real Options ◽  
Real Option ◽  
Economic Value ◽  
Management Tool ◽  
Residential Property ◽  
Option Valuation ◽  
Content Type ◽  
Real Option Analysis ◽  
Real Option Valuation ◽  
Mixed Use

Purpose Uncertainties in residential property investment performance require that real estate assets are designed in a flexible manner to respond to impacts of market dynamics. Though estimating the cost of flexibility is straightforward, assessing the economic value of flexibility is not. The purpose of this study is to explore the potential practical application of real option analysis to determine the economic value of a switching output flexibility embedded in a residential property investment in Australia. The study involves the exploration of an optimal strategy for investment in a residential development through real option analysis and valuation of a mixed use investment. Design/methodology/approach The real option valuation model developed by McDonald and Siegel (1986) is adopted for the evaluation because the switching output flexibility is likened to a perpetual American call option with dividend payout. Findings Through real option analysis, the economic value of switching output flexibility of the mixed use building was determined to be higher than the initial upfront costs. Moreover, a payoff of about $4million was determined to be the value of the switching output flexibility, therefore justifying upfront investments in flexibility as an uncertainty and risk management tool. Practical implications This application is an important demonstration of the practical use of options pricing techniques (real options analysis) and delivers further evidence needed to support the adoption of real option valuation in practice. Flexibility can also enhance risks and uncertainty management in residential property investment better than the adjustment of discount rates. Originality/value There is limited evidence on the use of real options techniques for the valuation of switching output flexibility in practice, and this comes as an original application; both the case study and data are all initial applications of switching flexibility in the Australian property market.

scholarly journals Real Option Exercise: Empirical Evidence

2019 ◽  
Vol 33 (7) ◽  
pp. 3250-3306
Author(s):  
Paul H Décaire ◽  
Erik P Gilje ◽  
Jérôme P Taillard
Keyword(s):  
Real Options ◽  
Empirical Evidence ◽  
Peer Effects ◽  
Real Option ◽  
Exercise Behavior ◽  
Project Level

Abstract We study when and why firms exercise real options. Using detailed project-level investment data, we find that the likelihood that a firm exercises a real option is strongly related to peer exercise behavior. Peer exercise decisions are as important in explaining exercise behavior as variables commonly associated with standard real option theories, such as volatility. We identify peer effects using localized exogenous variation in peer project exercise decisions and find evidence consistent with information externalities being important for exercise behavior. (JEL G30, G31, G32)

Integrating Real Option and Dynamic Capability Theories of Firm Boundaries

2011 ◽  
pp. 187-203
Author(s):  
Alfred G. Warner ◽  
James F. Fairbank
Keyword(s):  
Real Options ◽  
Real Option ◽  
Political Influence ◽  
Dynamic Capability ◽  
Technical Expertise ◽  
Firm Organization ◽  
Technology Standard ◽  
Standardization Process ◽  
Product Standard ◽  
Firm Attributes

Firms often acquire other firms to source technology but it is unclear why they might assume such risk by buying before a product standard is established in their industry. We draw upon real options and dynamic capability theories of firm organization to develop an integrated framework that explains why firms might acquire early and which firms are more likely to do so. We develop propositions regarding certain firm attributes as predictors of acquisition timing relative to passage of a technology standard. We argue that from a real options perspective, the primary reason firms acquire early is related to the firm’s knowledge of the technology. However, attributes such as political influence in the standardization process, prior experience making acquisitions, and how the firm resolves uncertainty about the technical expertise of potential acquisition targets are capabilities that also enter the acquisition timing decision. We provide a model based on those propositions and address how it can be empirically tested.

BIOPHARMACEUTICAL ALLIANCES AND COMPETITION: A REAL OPTIONS GAMES APPROACH

2013 ◽  
Vol 17 (06) ◽  
pp. 1340023 ◽  
Author(s):  
GIOVANNA LO NIGRO ◽  
AZZURRA MORREALE ◽  
SERENA ROBBA ◽  
PAOLO ROMA
Keyword(s):  
Pharmaceutical Industry ◽  
Molecular Biology ◽  
Real Options ◽  
Pharmaceutical Company ◽  
Technological Progress ◽  
Biotechnology Industry ◽  
Optimal Timing ◽  
Biotechnology Companies ◽  
Timing Decisions ◽  
First Mover

The competitive landscape where pharmaceutical and biotechnology companies operate has changed radically due to a scientific/technological progress that has revolutionised the process by which drugs are developed. In fact, pharmaceutical industry more and more relies on advances in biochemistry and molecular biology. As a consequence, the number of partnerships between pharmaceutical and biotech firms has grown significantly. Research contributions addressing the biopharmaceutical alliances design have also focused on the optimal timing to sign a partnership. In this paper, we introduce and analyse the effect of competition in biotechnology industry by modelling the decisions of whether and when ally with a pharmaceutical company through a real options game. We find that the timing decisions depend on the level of the competition, synergies obtained through the alliance and contract terms offered by the pharmaceutical company as well. Also, we show that the first mover might not always pre-empt the follower in partnering with the pharmaceutical company.

scholarly journals Evaluation of wind park tax incentives in Colombia by means of real options

2020 ◽  
Vol 19 (1) ◽  
pp. 459
Author(s):  
Miguel Jiménez-Gomez ◽  
Natalia Acevedo-Prins
Keyword(s):  
Real Options ◽  
Real Option ◽  
Renewable Energy Sources ◽  
Tax Incentives ◽  
The Real ◽  
Average Value ◽  
Price Increases ◽  
Fiscal Incentives ◽  
The Mean ◽  
Regression Toward The Mean

<p>The objective of this study is to assess tax incentives in Colombia to foster investment in wind parks. Fiscal incentives seek to diversify energy consumption with non-conventional renewable energy sources, since power is mostly generated by hydraulic force and since its price is impacted during dry seasons. The price of energy is modeled according to a regression toward the mean. This stochastic process was chosen because during droughts in Colombia there are price increases, which then return to their average value. This is an upward and downward spike behavior, as well as a regression toward the mean. Given price uncertainty and its impact on cashflow, wind parks were valued with real options to flatten the reversal for five years. The real option of flattening as an American call option was considered. Results show that, according to traditional valuation methods, wind parks in Colombia are not profitable even with tax incentives. However, according to the real options method, tax incentives do make these projects economically viable.</p>

scholarly journals Just-in-Time system in terms of real options

Competitio ◽  
2020 ◽  
Vol 3 (1) ◽  
Author(s):  
Andrea Rozsa
Keyword(s):  
Resource Allocation ◽  
Real Options ◽  
Best Practice ◽  
Real Option ◽  
Corporate Strategy ◽  
Capital Budgeting ◽  
Just In Time ◽  
The Real ◽  
Practice Approach ◽  
Physical Assets

The value creation process in a company and the competitive position are critically influenced by corporate resource allocation and proper valuation of investment alternatives. After the Second World War, capital budgeting and strategic planning emerged as two complementary but different systems for resource allocation. The real options approach developed in the ’80s may provide a useful tool for making a connection between capital budgeting and strategic management. Real options are implicit managerial and operating flexibilities embedded in many non-financial assets and liabilities. In a wider sense: “A real option is the investment in physical assets, human competence, and organisational capabilities that provide the opportunity to respond to future contingent events” (Kogut-Kulatilaka, 2001). This paper shows that Just-in-Time (JIT) system as management philosophy can be regarded as a knowledge-based or capability-based implicit strategy rather than a simple, easy-toimitate best practice approach. Moreover, implementation of JIT can be considered as a strategic investment. The presentation focuses on how the relation among strategic investments, developed technological systems and corporate strategy can be expressed through the real options view.

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