Abstract
This study aimed at determining effect of corporate diversification on real option as a component of market value of firms. Hypotheses were formulated and tested for sixty four listed firms at the NSE. The study applied census survey since population under study is countable. The time frame of analysis is five years between 2013 and 2017.Out of the 64 listed companies targeted, 52 were analyzed forming 81% of the population. A positivistic research philosophy was used since it’s based on quantification of phenomena under study. Correlational descriptive research designs and correlation analysis were applied. Formulated hypotheses were tested by application of hierarchical multiple regression analysis. The results show a direct significant association between the variables line with previous studies findings. The findings can be used by the management to value joint ventures independently at point of termination. The study can also benefit scholars by providing analytical tools to make strategic decisions. Policy Makers will use the study to craft relevant corporate regulations on real option investments. Keywords: Corporate diversification, real option, market value of firms, globalization DOI : 10.7176/RJFA/10-2-02
Highlights
Valuation approach for determining the true value of a company has remained a hotly contested subject by investors and academicians alike
The motivation for undertaking this study is to find out whether real option approach would be the panacea that financial economics and investors need to fill this gap
The result shows that firms are adopting real option in their quest to grow by diversifying their business lines and locations
Summary
Valuation approach for determining the true value of a company has remained a hotly contested subject by investors and academicians alike. The motivation for undertaking this study is to find out whether real option approach would be the panacea that financial economics and investors need to fill this gap. Myers (1977) first proposed option pricing theory as an alternative in valuing growth opportunities plus firm’s specific options that can be accessed by companies. Number of studies has proposed different models to value the various options held by firms key one being real option– that is by the decisions that are yet to be made but for which the firm has adequate resources and capacity to undertake. Number of studies has proposed different models to value the various options held by firms key one being real option– that is by the decisions that are yet to be made but for which the firm has adequate resources and capacity to undertake. (Kester, 1984; Smit, 2000; & Danbolt et al, 2002). Paddock et al 1988, Quigg 1993 & Adam and Goyal, 2002)
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