Real Options Perspective Research Articles

Strategic timing of corporate social responsibility investments under reputational risk

We analyze a company’s corporate social responsibility (CSR) investments from a real option perspective to determine the value of the CSR investments and the optimal time to invest in CSR, taking into account reputational risk. Previous studies on CSR investments as real options often assume that companies can invest in CSR solely at the time of maturity and that investment costs are known at the outset. Our study extends this research by incorporating realistic viewpoints: Companies can invest in CSR at multiple points in the future; postponing CSR investments may result in reputational losses; and the costs associated with such investments undergo stochastic evolution. We determine the value of CSR investments and answer the question of when to optimally invest in CSR. We examine a real-world example of the palm oil scandal involving Sinar Mas and Nestlé in 2008-2010 and explain why Nestlé repeatedly postponed investing in CSR, i.e., delayed the termination of its contract with Sinar Mas.

A Real Options Perspective on Entrepreneurial Orientation and Government Ties

Firms’ strategic orientation toward entrepreneurship exposes them to regulatory uncertainties. Prior research suggests that addressing these uncertainties through corporate political activities (CPA) may require costly trade-offs, such as the loss of strategic flexibility. We argue that some of these trade-offs can be mitigated by the way firms structure their CPA. We extend the insights from real options reasoning (ROR) to offer a framework for how firms may circumvent some of these trade-offs through greater CPA breadth, which allows firms to retain their strategic flexibility while reaping some of the benefits of CPA.

A Little in a Lot: A Real Options Perspective on Entrepreneurial Orientation and Government Ties

A Little in a Lot: A Real Options Perspective on Entrepreneurial Orientation and Government Ties

Asset redeployability and firm value amidst the COVID-19 pandemic: A real options perspective

The redeployability of a firm's assets plays a pivotal role during the COVID-19 pandemic. This paper introduces a real options model that elucidates a firm's decision-making process regarding the reallocation of assets between its primary business product and emergency supplies. Furthermore, it explores the influence of asset redeployability on firm value. Theoretical results underscore the positive impact of asset redeployability on firm value, particularly evident in firms exhibiting a strong correlation between their main business product and emergency product. Empirical evidence from data encompassing A-share listed companies in the Chinese stock market during the COVID-19 period robustly substantiates these theoretical findings.

Realizing potential: a real option perspective on communities of practice in organizational transformation

This research aims to explore the recognized advantages of Communities of Practice (CoPs) in enhancing knowledge sharing and spurring organizational transformation. Despite their acknowledged importance, CoPs often receive inadequate attention or representation in numerous organizations, likely due to leaders' unfamiliarity or insufficient skills to manage such groups. This study introduces the "Real Option Perspective" as the recommended approach for top executives to understand and leverage CoPs. Initially, it clarifies the concepts of CoPs and the Real Option Perspective, highlighting their significance. These concepts then lay the groundwork for developing a management model for CoPs. The proposed management trajectory for CoPs involves five phases: Investment in CoPs, Recognition of Stagnation, Re-engagement with CoPs, Transition of Value, and finally, Dissolution and Feedback. This research seeks to expand the applicability of the Real Options framework in managing CoPs, providing leaders with strategic insights to fully realize the potential of CoPs in line with organizational objectives.

COVID-19 Pandemic, Corporate Investment and the Real Option Value

ABSTRACT The outbreak of COVID-19 has a huge negative impact on the firms’ business activities. This paper investigates the effects of COVID-19 pandemic on corporate investment and firm value from the real option perspective. Based on the real options-based model (ROM) proposed by Zhang (2000), we find that COVID-19 crisis accelerates low-profitability firms to reduce investment and exercise put options timely, thereby increasing the value of put options. This finding mainly exists in areas where the COVID-19 pandemic was worse and firms that did not receive government subsidies related to COVID-19. We also find that the value of put options is more pronounced for non-state-owned enterprises and firms with higher internal control quality. However, we do not find the change of growth option value of high-profitability firms during the COVID-19, which indicates that it is difficult for high-profitability firms to grasp the investment expansion opportunities under the pandemic. Our study sheds light on the applicability of ROM and the importance of real option in firm valuation under the major public emergencies.

How uncertainty shapes herding in the corporate use of artificial intelligence technology

In its recent form, Artificial intelligence (AI) is an ensemble of technologies, which can be defined as machine-based systems for effective enterprise automation and influential decisions”. If businesses that use AI can potentially reap a competitive advantage, the optimal exploitation of such a complex ensemble of technologies remains uncertain as well as requires to have competitive access to complements such as data or new skills. Existing models of organizational use of technologies often ignore either the dynamics of competitive interactions (which can lead to pre-emption or epidemic diffusion) or the role of uncertainty, or both. In the case of AI, one type of uncertainty is particularly important: uncertainty about the technology's use cases (i.e., what to do with it). This paper proposes to apply a real options perspective to the Technology-Organization-Environment (TOE) adoption framework in order to uncover important patterns in the use of AI among firms. The results are threefold: (1) we find evidence of significant epidemic effects in AI use, (2) uncertainty moderates epidemic effects, and (3) the impact of uncertainty depends on its source: an uncertain AI use case reduces herd behaviours while uncertainty about use case returns still favours them. These results highlight the importance of exploration and collective learning in the diffusion of emerging and complex technologies, especially when companies struggle to identify the most profitable use cases for the technology.

Time to Exercise Options: Post-entry Modes of IJVs from a Real Options Perspective

Time to Exercise Options: Post-entry Modes of IJVs from a Real Options Perspective

Rethinking the evaluation of solar photovoltaic projects under YieldCo mode: A real option perspective

Many corporations invest in solar photovoltaic (PV) projects to mitigate climate change. However, lack of capital poses a great challenge to the development of the solar PV industry. YieldCos that are a financial tool to securitize assests for renewable energy corporations were introduced to alleviate the financial pressure, but their achievements are unable to meet the expected performance level. Therefore, a question araises: Can YieldCos promote the development of solar PV industry? To solve this issue, this paper utilized a real option method to investigate whether YieldCos can facilitate the deployment of solar PV projects and their impact on decision-making processes. Based on the solution obtained from the real option model, we explore the impacts of decisive factors on the defer option value, investment threshold and expected execution time. The joint impacts of the dividend ratio and other factors are also investigated. We conclude that YieldCos are suitable for solar PV projects, while a high dividend ratio will make investors postpone their investments. In addition, by using the technological level to represent the drift term of investment, we further discuss how decision-makers should react to the potential technological innovation. Moreover, we also discuss the impacts of potential declines in feed-in tariffs on investors’ behaviour. We conclude that YieldCos can promote the development of solar PV in China as it can urge investors to invest at an early stage. Related policy recommendations are also proposed.

When to invest in electric vehicles under dual credit policy: A real options approach

AbstractThis research aims to investigate traditional vehicle manufacturers' green technology investment theory under dual credit policy from the perspective of real options, overcoming earlier investigations of this issue that considered it only from a stability or single uncertainty perspective. An analytical real options model was first provided for traditional automaker investment. Then we solved the analytical solution for the electric vehicle investment threshold based on the uncertainty of credit price and fuel vehicle market scenarios. The optimal electric vehicle investment timing is demonstrated using numerical simulation. Results show that (1) when the fuel vehicle market demand falls to a certain level, automakers will choose to make electric vehicle investments regardless of how the credit price changes in the market; (2) the effect of volatility on the investment threshold depends on the covariance or correlation coefficient; (3) the numerical simulation results revealed that the credit price drift rate, risk‐free rate, correlation parameters, and electric vehicle production cost all have a positive impact on the electric vehicle investment region, whereas the drift rate of fuel vehicle and electric vehicle production cost have a negative impact. These results can be used to make theoretical conclusions about electric vehicle investments.

A real options perspective on international strategic alliance formation: the role of distance and strategic motives

A real options perspective on international strategic alliance formation: the role of distance and strategic motives

The optimal performance target of valuation adjustment mechanism agreement with real options perspective.

The valuation adjustment mechanism ('VAM') agreement has recently been widely adopted in venture capital investment in emerging markets. The VAM agreement endows venture capital institutions a contractual right to reevaluate invested startup contingent on preset performance targets, which is crucial for the effectiveness of the VAM agreement by deeply affecting the strategy and fate of the startup. Motivated by exploring a rational performance target setting, this paper: 1)Firstly, extracts a general structure of the VAM agreement by cases analysis;2) Secondly, adopts a real options methodology to derive the option value held by venture capital institutions and how the pre-determined performance target affect the payoff of venture capital institutions;3)Thirdly, derives the expected time to achieve the given performance target and the behavior choice of entrepreneurs of startups; 4)Finally, by maximizing the contractual value of venture capital institutions with the participation constraints of the entrepreneur, derives the optimal performance target setting. The result finds that the option value of the VAM agreement is positively related to the performance target. It may partially explain why venture capital institutions tend to dominate overly high targets from a real options perspective. We also confirm the incentive effect of the VAM agreement that entrepreneurs tend to exert their best effort. Furthermore, the derivation of the optimal performance target shows that it is an increased function of the agreement period and a subtractive function of project risk. This paper contributes to the literature on contingent payment mechanisms and provides practical implications for the VAM agreement design.

Disentangling reciprocal relationships between R&D intensity, profitability and capital market performance: A panel VAR analysis

Research and development (R&D) investments are strategic choices that firms make to create and sustain competitive advantage. Extant literature proposes that firms’ R&D investments and their profitability and capital market performance are reciprocally related. However, the direction of these relationships and their temporal nature are unclear. We take a real options perspective to argue that the long-run firm performance effects of R&D investments are better than their short-term ones, and that the initial level of R&D intensity influences the nature of these relationships. We apply panel vector autoregression (P-VAR) to a sample of 6623 U.S. firms over the 1990–2020 period in order to test our hypotheses. Our results indicate that increases in R&D intensity have negative effects on profitability in the short term, yet these effects diminish relatively quickly. The effects of increases in R&D intensity on capital market performance are positive and persist over time. Consistent with our predictions, they are contingent on the initial levels of R&D intensity and performance. The findings are fundamentally in line with the real options perspective employed here, yet they add important nuance to our understanding of when, how, and under which conditions R&D investments and firm performance affect one another.

Managerial Flexibility Implications of Globalization Strategies

This research is a first attempt to provide empirical evidence with a unique panel database on the strategic value implications of corporate globalization of the largest multinational enterprises (MNEs) in terms of R&D expenditures. In the extant multinationality-performance research, only financial performance indicators are used. The value of active management under high uncertainty is therefore ignored. In the process of business global expansion as well as R&D investment, high market uncertainty is precisely the reality that MNEs face. Our research builds on the real options perspective to investigate the managerial flexibility implications of home-region orientation of top R&D spending MNEs. The current research has three main findings. First, host-regional MNEs have higher upside potential and downside risk than home-regional MNEs. Second, MNEs can exploit innovation FSA in the home-region more efficiently, compared to non-home regions. Finally, we also found that the corporate globalization strategies of companies contribute to the company’s managerial flexibility, to certain extent, due to the specificities of company’s regional culture, institution and economic development, as well as the industrial structure of the company’s industry.

The effect of trademark breadth on IPO valuation and post-IPO performance: an empirical investigation of 1510 European IPOs

Trademarks differ in breadth and can cover a wide range of categories of goods and services. We draw on real options theory and argue that greater trademark breadth constitutes a valuable real option that is associated with higher firm valuation and performance. We analyze a sample of 1510 firms that went public in Europe between 2002 and 2015 and find a positive effect of trademark breadth on initial public offering (IPO) valuation and post-IPO performance. We implement a contingency analysis to contrast real options and signaling theory and find stronger support for the real options perspective.

A Price-Based Grid Resources Pricing Approach for NonStorable Real Assets

A grid-computing paradigm delivers the processing power of massively parallel computation to all subscribed users. Current trends, research, and developments in grid computing show that the available grid resources exist as non-storable compute commodities and are distributed geographically – the grid problem. To solve the grid problem, several initiatives have developed frameworks for grid economy and have proposed several algorithms towards an optimized resources scheduling in a grid environment. However, since the grid resources availability depends on the time of usage and are transient, such generic approaches lack the ability to capture the realistic valuation of the resources and fail to guarantee the certainty in their availability measured as Quality of Service (QoS). Uncertainties in grid resource availability do not guarantee a user expected QoS without over committing (e.g., storing the non-storable resources) resources to the users. To guarantee QoS (satisfy a users’ computing needs), we propose a price-based and quality-aware model that captures the realistic value of the grid compute commodities. We use the financial option theory from a real option perspective to value grid resources by treating them as real assets. We discuss a set of results on pricing grid compute cycles. Our results are based on the compute cycle usage obtained from the WestGrid node at the University of Manitoba. We extend and generalize our study to any grid in general but with specific reference to the WestGrid. Keywords: Financial Options, Price Stochasticity, Compute Cycles, Real Options, Quality of Service. Allenotor, D. & Oyemade, D. A. (2022): A Price-Based Grid Resources Pricing Approach for Non-Storable Real AssetsJournal of Advances in Mathematical & Computational Science. Vol. 10, No. 2. Pp 1-18 DOI: dx.doi.org/10.22624/AIMS/MATHS/V10N2P1. Available online at www.isteams.net/mathematics-computationaljournal.

Will a Geopolitical Conflict Accelerate Energy Transition in Oil-Importing Countries? A Case Study of the Philippines from a Real Options Perspective

Geopolitical conflicts, involving a major player in the world market, affect the prices of oil and commodities, particularly in oil-importing countries. Consequently, the unprecedented changes in oil prices impact investments in energy transition projects. This study aims to analyze the dynamics of investment decisions in energy transition under uncertainties in geopolitical risks. This research applies the Black-Scholes-based real options valuation to value the flexibility in postponing energy transition investments considering the repercussions of the Russia-Ukraine war. Applying the proposed model to the case of the Philippines, the valuation result with a net present value of USD 231 million for a 1 GW capacity shows that energy transition is a viable project when the cost savings from using fossil fuels to renewables are considered. On the other hand, real options valuation finds a higher flexibility value of USD 990 million, which implies a better decision to postpone the project. The uncertainty in geopolitical conflicts further increases this value causing a longer waiting period to implement the energy transition project. Sensitivity analysis shows that the results are robust to changes in the explanatory variables. Results provide policy implications on making an oil-importing country energy self-sufficient and robust from economic and geopolitical shocks.

Location-boundedness, investment irreversibility, and divestment of international joint ventures under host market demand uncertainty

We employ the real options perspective to examine how the irreversibility of location-bound assets and resources affects the divestment of international joint ventures (IJVs) under exogenous uncertainty in host countries. Utilizing a large sample of Korean IJVs and addressing a sample selection of IJVs and the endogeneity of firms’ choice of location-bound investments, we find that high host market demand uncertainty interacts with localized products or local sales forces and reduces divestment rates of IJVs. We also find that the deterrent effects of these two country-specific investments are more salient for IJVs with local sourcing and sales. These findings imply that the deterrent effect of location-boundedness is congruent with the uncertainty-based real options theory when explaining IJV divestment.

Capabilities and options in uncertain environments: A study of global offshoring

While the impact of environmental uncertainty on the relationship between firm capabilities and firm performance is still unclear, we adopt the integrated perspective of dynamic capabilities and real options to explore this issue under the context of global offshoring. We propose that an offshoring firm could benefit from its offshoring capabilities to configure globally dispersed activities as options in uncertain environments. In addition, the managerial attention and discretion guided by a corporate strategy to implement offshoring, an execution of options, could help explain the variance of firm performance. As firms own equivalently offshoring capabilities and face the same level of environmental uncertainty, we further argue that the implementation of a corporate-wide offshoring strategy would result in better performance by capturing the value of options. Using the firm data from the Corporate Client Survey of Offshoring Research Network and the uncertainty measurement from the International Country Risk Guide, we find the empirical support for our premises.

Does patent abandonment weaken performance persistence? A real option perspective

ABSTRACT Most studies on patent renewal propose that abandonment indicates low quality and weakens firm performance. However, in practice, firms sometimes abandon patents as a rational strategy for pruning their patent portfolios. The discordance between literature and practice manifest a research gap. Studies of patent quality view usually focus on individual patents but overlook firms’ strategic blueprints. This study aims to reconcile this discordance through real option perspective, by elaborating on how patent abandonment affects performance persistence. The empirical analysis uses panel data of 1920 listed firms in mainland China. The results show that patent abandonment is negatively but not significantly associated with performance persistence, indicating the limited explanatory power of the patent quality view. Furthermore, this study finds that uncertainty strengthens the relationship between the two variables, especially in the presence of a diverse patent portfolio. These findings are consistent with the arguments of real option theory and confirm the option value of abandoned patents.