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Article

Changwen Ke, Zongjun Wang and Guo Cheng

This paper has the purpose of looking into the role that financing and abandonment options play in the value of Chinese real estate development projects.

Abstract

Purpose

This paper has the purpose of looking into the role that financing and abandonment options play in the value of Chinese real estate development projects.

Design/methodology/approach

The paper is based on library research, which is used to support and extend the authors' personal knowledge and experience.

Findings

The paper finds that financing and abandonment options create important value in the real estate projects of China, and produce enormous profits for the developers.

Practical implications

The paper indicates that the Chinese government should improve the legislative and regulatory frameworks to control excessive value produced by the financing and abandonment options, and restrict the ability of developers to amass social wealth by exploiting legal loopholes.

Originality/value

The paper examines the financing and abandonment options embedded in Chinese real estate development projects, measures the specific value of the two options based on a case study, and analyzes some factors affecting the value of the two options.

Details

Journal of Corporate Real Estate, vol. 9 no. 2
Type: Research Article
ISSN: 1463-001X

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Article

John W. Kensinger

Models for valuing an option to exchange one commodity for another, or any combination of n commodities for some combination of m others, are applied to the capital…

Abstract

Models for valuing an option to exchange one commodity for another, or any combination of n commodities for some combination of m others, are applied to the capital budgeting problem. By analyzing a project in the exchange option pricing framework, it is possible to draw wellfounded conclusions about the effects on project value of such attributes as flexibility and innovativeness. A project which uses systems that have many alternative uses is recognized by such analysis to be more valuable than an otherwise identical project which uses very specialized systems, because the former provides a greater array of choices. Likewise, a company which thinks of a new use for some kind of system will be able to generate a project which has a higher value than any other company could generate from the same system. By including divestiture as one of the alternatives in the portfolio of options representing a project, it is possible to incorporate project abandonment into the analysis, which is an improvement over earlier methodologies which simply add the value of the “abandonment optionto the discounted cash flow net present value. Finally, shortcomings of the options approach to capital budgeting are discussed.

Details

Managerial Finance, vol. 14 no. 2/3
Type: Research Article
ISSN: 0307-4358

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Book part

Kavous Ardalan

The purpose of this chapter is to discuss the potential contribution of the option applications to economic instability. To this end, the chapter briefly reviews the…

Abstract

The purpose of this chapter is to discuss the potential contribution of the option applications to economic instability. To this end, the chapter briefly reviews the extant literature on financial option pricing and its applications to corporate assets and liabilities. It focuses on the direct relationship between the volatility of the underlying asset and the value of the option. It shows that the theory of option applications by its one-sided emphasis on the value-creating role of volatility promotes excessive risk-taking. Then the chapter discusses how the theory of option applications through the educational system encourages economic agents to make excessively risky decisions. Furthermore, the interactions among these risk-welcoming agents lead to an economic system which becomes increasingly risky. This risky economy, combined with the fact that more than half of the value of the option applications is constituted by the highly volatile value of the options embedded in such applications, translates into wide variations in real investments and the economy.

Details

Derivative Securities Pricing and Modelling
Type: Book
ISBN: 978-1-78052-616-4

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Book part

Isin Guler

This study empirically examines how firms manage real options over time in the context of the U.S. venture capital industry. It tracks the venture-capital funding…

Abstract

This study empirically examines how firms manage real options over time in the context of the U.S. venture capital industry. It tracks the venture-capital funding histories of U.S. portfolio companies founded during 1989–1993, and their outcomes, until 2004. An examination of sequential investments suggests asymmetries in the management of successful and unsuccessful companies. Signals of a company's progress, such as the number of its patents, are significant predictors of VC investment practices in the case of successful companies, but not in the case of unsuccessful companies. In contrast, VC firm characteristics, such as experience in the company's industry, IPO experience, and geographic proximity, appear to explain variance in investment policies for unsuccessful companies, but not successful ones. This suggests that signals of progress are relatively easier to interpret when real options perform well over time, and investors can perhaps apply them equally effectively. In contrast, signals of failure are more ambiguous and complex; and firm-level differences are more pronounced in the management of unsuccessful options.

Details

Real Options Theory
Type: Book
ISBN: 978-0-7623-1427-0

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Book part

Russell W. Coff and Kevin J. Laverty

Scholars have begun to recognize the importance of integrating organizational issues into real options theory. In doing so, some argue that options are inappropriate for…

Abstract

Scholars have begun to recognize the importance of integrating organizational issues into real options theory. In doing so, some argue that options are inappropriate for evaluating critical strategic investments. In a more in-depth analysis, we argue that the organizational form that an option takes has a profound effect on exercise decisions. When options are initially integrated, organizational elements such as routines and culture become increasingly intertwined over time, raising the cost of abandoning the option – in effect, pushing firms to exercise options. In contrast, initially isolated options become idiosyncratic and more costly to integrate over time – pushing firms to kill them. There are also reputational and social capital effects that may bias exercise decisions beyond the mere consideration of costs, leading to escalation or missed opportunities.

Accordingly, firms must first be able to manage the associated organizational costs and minimize systematic bias in exercise decisions. Real options theory is moving away from the limitations of the financial options analogy and is increasingly integrated with strategy and organization theory. This shift requires that researchers consider issues such as intermediate organizational forms, external monitoring of exercise decisions, portfolios of competing options, and group process interventions.

Details

Real Options Theory
Type: Book
ISBN: 978-0-7623-1427-0

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Article

Kerstin Pull

At a time of intensifying uncertainty, managerial flexibility to adapt to changes in the economic environment is increasingly important. Different business locations, it…

Abstract

At a time of intensifying uncertainty, managerial flexibility to adapt to changes in the economic environment is increasingly important. Different business locations, it is frequently argued, offer this flexibility to differing degrees, labor law being one essential factor in determining the resulting attractiveness of a country as a business location. This paper takes an options perspective in order to grasp the potential effect of labor law on location decisions. The option value of an investment, it is argued, is influenced, among other factors, by labor law provisions. Depending on their preference for a certain set of options, different investors will prefer different labor market settings. The ability of the options perspective to assess the role of labor law for the attractiveness of international business locations is exemplified in a British‐German comparison and confronted with data on the composition of foreign direct investment in the two countries.

Details

Management Decision, vol. 40 no. 7
Type: Research Article
ISSN: 0025-1747

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Book part

Todd Fister and Anju Seth

This paper complements previous research on investment in firm-specific human capital by applying real options analysis. Our framework suggests that the parties receive…

Abstract

This paper complements previous research on investment in firm-specific human capital by applying real options analysis. Our framework suggests that the parties receive valuable options to exit the contract when information becomes revealed in the future, but these options may be more valuable for one party than the other. Companies and workers attempt to reduce the value of the options through contractual mechanisms that either shift wealth to the party granting the option or prevent the option from being exercised. In both cases, the mechanisms cause the parties to invest in firm-specific capital, resulting in higher output and higher wages.

Details

Real Options Theory
Type: Book
ISBN: 978-0-7623-1427-0

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Article

Sudi Sudarsanam, Ghulam Sorwar and Bernard Marr

The aim of this paper is to discuss intellectual capital (IC) from a valuation perspective and examine the nature of such capital and why traditional valuation methods…

Abstract

Purpose

The aim of this paper is to discuss intellectual capital (IC) from a valuation perspective and examine the nature of such capital and why traditional valuation methods fail to reflect the unique characteristics of IC and propose an alternative approach that captures them.

Design/methodology/approach

The paper builds on the existing literature in the fields of financial valuation and IC. The analysis of these fields allows us to combine them and discuss the possible usage and limitations of real option models for the assessment of intellectual capital in firms.

Findings

A valuation perspective is developed based on the real option models that have been extended from their origin in financial asset valuation to the valuation of firms' growth opportunities. Intellectual resources embody these opportunities contributing to both their evolution over time and their realisation in future. A typology of IC is developed based on the influence upon the various valuation parameters of real options. This approach provides a richer framework to analyse the relationship between IC and corporate value.

Practical implications

Clarification of the relationship between IC and managerial flexibility as a source of value will help managers understand how they can create and leverage such flexibility to create value. The paper enables managers to understand how different types of IC impact on risk taking, timing of investment projects and the value of speculative investments.

Originality/value

The paper clarifies the nature of IC in the way it contributes to managerial flexibility to gain competitive advantage and exploit growth opportunities. It extends the real options valuation framework to the valuation of intellectual assets thus providing a link among intellectual assets, business strategy and firm value.

Details

Journal of Intellectual Capital, vol. 7 no. 3
Type: Research Article
ISSN: 1469-1930

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Book part

Yong Li, Barclay E. James, Ravi Madhavan and Joseph T. Mahoney

We discuss recent developments in real options theory and its applications to strategic management research, examine the potential difficulties in implementing real options

Abstract

We discuss recent developments in real options theory and its applications to strategic management research, examine the potential difficulties in implementing real options in theory and practice, and propose several areas for future research. Our review shows that real options theory has provided substantial insights into investment and exit decisions as well as into the choice of investment modes. In addition, extant research studies have contributed significantly to our understanding of whether and how organizations can benefit from real options. Future research that addresses difficulties in applications will further advance both real options theory and practice in strategic management. We call for future generations of research to enhance the impact of real options as an emerging dominant conceptual lens in strategic management.

Details

Real Options Theory
Type: Book
ISBN: 978-0-7623-1427-0

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Article

William Wilson, Sumadhur Shakya and Bruce Dahl

The purpose of this paper is to develop an analytical model to value traits at different developmental phases and to determine the value of drought tolerance (DT) in wheat…

Abstract

Purpose

The purpose of this paper is to develop an analytical model to value traits at different developmental phases and to determine the value of drought tolerance (DT) in wheat using GM technology.

Design/methodology/approach

A stochastic binomial real-options model of GM traits was developed to estimate the value of a DT wheat trait.

Findings

The results indicate that the value of DT wheat using GM technology is in-the-money at each development phase. The greatest value would accrue for the Prairie Gateway and Northern Great Plains regions in the USA.

Research limitations/implications

The approach is useful for valuing high-cost risky investments in technology and results provide guidance for development strategies.

Originality/value

The model is original and its applications to wheat are unique.

Details

Agricultural Finance Review, vol. 75 no. 2
Type: Research Article
ISSN: 0002-1466

Keywords

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