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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.

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

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.

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.

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.

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 option” to the discounted cash flow net present value. Finally, shortcomings of the options approach to capital budgeting are discussed.

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.

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.

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.

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.

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.

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.

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.

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

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.

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

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

The concept of option pricing is used to develop an alternative model for pricing services that have a fixed availability and expiration. The binomial option pricing model and abandonment theory are financial models used to demonstrate that the option to cut price contributes positively to a service’s expected profitability. Pricing of hotel rooms is used to demonstrate in a marketing context the use of this option model approach. Airline seats, events, and vacation house rentals are some of the many other alternative applications among consumer services, as broadcast time is a similar example among industrial services.

The financial analysis of international investment decisions is complex. The basic methodology which homes in on incremental cash flows needs to be refined in order to focus upon cash flows which are remittable to the parent company, for it is only these that would logically add shareholder value. Build in the complications of two lots of tax and changing exchange rates and the equation looks anything but simple. But there is another complexity too which renders the traditional discounting methodology less than wholly appropriate. And this applies not just to international investment but to any situation where capital is committed with an option to expand or curtail embedded in it. This is not to say that the typical model cannot be adapted to meet the situation. It can and it is not too difficult.

The purpose of this paper is to use some of the contributions of the option pricing theory to solve three outstanding puzzles in finance: the underdiversification puzzle, the volatility puzzle and the equity premium puzzle.

To approach the issue, this paper considers the applications of the option pricing theory to both sides of the corporate balance sheet. Applications to the left-hand side of the balance sheet has led to the real options theory that has expressed the value of a capital budgeting project as the sum of the values of its “discounted cash flow (DCF) method” and “real options.” This paper argues that, because the balance sheet must balance, the value of equity, which appears on the right-hand side of the balance sheet, should also be expressed as the sum of the values of its “DCF method” and “equity options.”

This proposed model of equity valuation solves the three outstanding puzzles in finance: the underdiversification puzzle, the volatility puzzle and the equity premium puzzle.

This study may not be able to explain the full extent of the three puzzles.

The dividend discount model of equity valuation needs to be augmented by an option component.

The community of finance scholars will become more confident of their scholarly work because three puzzles will be solved to a great extent.

To the best of author’s knowledge, the extant literature does not either solve any single one of the three puzzles through the contributions of option pricing theory or solve all three puzzles at the same time with a single solution. The originality of this paper is that it makes both of these contributions to the extant literature.

The interpretation and valuation of real options by means of options pricing theory can be regarded as a relatively new paradigm of investment theory. Option pricing theory based investment valuation represents a sound theoretical basis and offers principally a simple decision base. The approach recognises entrepreneurial flexibility and risk explicitly. It implies a positive correlation between flexibility respectively uncertainty and the value of options. Traditional deterministic‐dynamic standard methods of valuation are not able to value flexibility or risk effectively so that option values are adequately reflected. As property investors gradually embrace modern financial concepts it is clear that real estate valuation theory will have to change. One of the most promising areas that could have an important implication on the further development of valuation is the application of the real options paradigm. The author investigates the transfer of general real options theory through an examination of academic results in the field of real estate development. He comes to the conclusion that current research generates highly academic‐abstract results with limited practical value. So far a limited number of quantitative studies regarding the valuation real estate projects with the real options method have been conducted. Practical valuations have yet to be comprehensively carried out. For doing so, further research concerning the basic prerequisites of real options theory has to be undertaken.

Interviews in South Korea, Taiwan, Singapore, and India indicate net present value (NPV) is not widely employed in making capital investment decisions in these newly industrialized and developing countries. It is not from lack of knowledge about net present value: rather, it is due to (1) widespread violation of the assumptions underlying NPV, (2) the high risk/high return nature of the capital investments, and (3) the decision‐making process employed in making capital investment decisions. These same three conditions exist for many capital investment decisions made by firms in developed countries. Only by abandoning the static NPV approach, building in real options, and understanding and building in the decision‐making process will further advances be made in capital budgeting decision‐making. One of the key paradigms in finance is net present value (NPV). In order to maximize value, managers should accept all positive NPV investment projects, and reject all negative NPV projects. The issue becomes more complex when uncertainty is introduced, or, as in recent years, when real options to defer, abandon, expand, etc. are incorporated into the decision‐making process [e.g., Dixit and Pindyck (1994) and Trigeorgis (1995 and 1996)]. However, with these exceptions, the state of the art in capital investment decision‐making revolves around the simple statement—take all positive NPV projects. In practice, evidence from surveys and discussions with corporate executives indicates the message taught for the last 30 years in business schools has been heard and, to a large extent, acted upon by larger U.S., Canadian, and British‐based firms. While larger firms in North America, and to a lesser extent Western Europe, generally employ the static, or traditional, NPV framework for making, or assisting in making, capital investment decisions, less is known about the decision‐making process employed by firms in other parts of the world. The question addressed in this study is: “Do firms in other parts of the world, especially in newly industrialized or developing countries in the Asia Pacific region, employ NPV for making capital investment decisions?” The purposes of this study are threefold: (1) to report the results of a series of open‐ended interviews conducted in South Korea, Taiwan, Singapore, and India about the capital investment decision‐making process employed; (2) to understand why NPV is not widely employed in making capital investment decisions in these newly industrialized and developing countries; and, most important, (3) to indicate that NPV and the capital budgeting decision‐making process need rethinking and refocusing to make them more effective—in all countries, whether developed, newly industrialized, or developing. The paper proceeds in the following manner. Section I provides an introduction to the study. In Section II the results of the interviews are presented. In Section III patterns that emerged during the interview process are presented, along with a number of specific examples of the types of capital investment decisions being considered. In Section IV the assumptions underlying NPV are examined, and then risk/return and the decision‐making process are considered. Section V contains the discussion and conclusions.