Managerial flexibility using ROV in South Africa: a survey of the top 40 JSE listed companies

Abstract

The traditional DCF (Discounted Cash Flows) -based techniques have been criticised in finance literature for their failure to incorporate flexibility in the evaluation of projects. Academics are advocating the use of Real Option Valuation theory (ROV) as it quantifies managerial flexibility, thereby bridging the gap between strategic thinking and finance theory and practice. The purpose of the study is to determine whether the largest firms in South Africa are using ROV and also to assess some of the factors that may influence their use of the technique. This paper presents the results of a survey of firms included in FTSE/JSE Top 40 index. The results suggest that while managers in these firms recognise and feel the need for flexibility in projects, most firms do not use ROV to plan their investments. This is largely attributed to managers being unaware of the technique, while the influence of the other factors is less clear.