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The evaluation of real options by managers: a potential aspect of the audit of management skills

Sydney Howell (Senior Lecturer Designate in Management Accounting and Control, Manchester Business School, The University of Manchester, Manchester, UK)
Axel J. Jägle (Consultant, Price Waterhouse, London, UK)

Managerial Auditing Journal

ISSN: 0268-6902

Article publication date: 1 August 1998

Abstract

Reports on a survey which asked 82 experienced managers from various functions, business levels, and industries to value case studies which were in effect real options on growth. Compares these empirical valuations with theoretical values derived from a specific real options model (European non‐dividend paying). In a questionnaire survey, participating managers showed high levels of agreement with various statements needed as assumptions in the real options model. They also accepted as realistic most of the parameter settings used in the experiment. Results imply that training is needed and likely to be acceptable to managers, and underinvestment could be explained by an inability to perceive option values. Choosing teams of decision makers may reduce the variance (but not the bias) of intuitive option valuations.

Keywords

Citation

Howell, S. and Jägle, A.J. (1998), "The evaluation of real options by managers: a potential aspect of the audit of management skills", Managerial Auditing Journal, Vol. 13 No. 6, pp. 335-345. https://doi.org/10.1108/02686909810222357

Publisher

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MCB UP Ltd

Copyright © 1998, MCB UP Limited