Real Options Perspective Research Articles

Technology spillovers and capital gains in corporate venture capital investments: evidence from the biopharmaceutical industry

ABSTRACT Using a framework combining the real option perspective and appropriation concerns raised in the entrepreneurial finance literature, we find that technology spillovers and capital gains created by corporate venture capital (CVC) investments are positively related with each other in the biopharmaceutical industry. However, this positive relationship is significantly decreased or becomes negative when CVC investments are made with solely financial objectives or in early-stage startups. This study provides evidence that the nature of the relationship between technology spillovers and capital gains that constitute the corporate investors’ total returns created by CVC investments.

Assessment of Overseas Subsidiary Survival in Chinese Provinces: A Longitudinal Study of Indian Multinationals

AbstractThis study provides a longitudinal survival assessment of Indian subsidiaries in Chinese provinces. We construct a panel dataset of Indian subsidiaries operating in Chinese provinces during 2004–2017 and examine survival using a panel probit model and Cox regression. The results support the real options perspective, the economic geography approach and the institution‐based view. Subsidiary exits were associated with smaller size, albeit higher in the manufacturing sector. There is a positive impact of sub‐national economic geography factors on subsidiary survival. The finding contributes to the South–South investment literature as it highlights the role of sub‐national factors in shaping subsidiary survival.

Career Uncertainty and Decision Making: A Real Options Perspective

Changes in the career landscape call for a rethinking of how people make career decisions. Current perspectives focus on matching career decisions with individual values and interest. This, however, neglects the role of time and uncertainty in a career. In this paper, we unpack how optimal matching approaches to decision making are challenged with the increasing complexity and uncertainty in careers. New approaches to career decision making are needed. Building on the recent application of heuristics to career decision making, we develop a real options perspective to careers and career decision making. In contrast, to an “optimal match” approach to decision making, a real options perspective reframes career decisions not just as point-in-time decisions but as decisions that shape future choices. In this paper, we unpack a set of theoretical propositions that explain the benefits of a real options decision making, particularly in situations of career uncertainty. In addition, we provide a typology of real option heuristics that can be applied for both career scholarship and practice.

Policy Uncertainty and Venture Capital Investment: A Real Options Perspective

Recent changes in the global geo-political environment have stimulated a growing interest in policy uncertainty, or uncertainty in future government policies. Whereas policy uncertainty has been shown to impact business activities in many other fields, it has received little attention in strategy surprisingly. This study investigates how policy uncertainty affects venture capital (VC) investment, which is often subject to high uncertainties. Taking a real options perspective, we predict that VCs will defer investment in startups under high levels of policy uncertainty, and that the effect will be strengthened by investment irreversibility. Results based on a large sample of VC- backed startups support our predictions. We contribute by applying real options to examine policy uncertainty and by providing first evidence that such uncertainty dampens VC investment.

Employer Strategy and Employee Job Quality: A Real Options Perspective

Although employers are fundamental actors who determine employee job quality, prior research has paid little attention to how employers' strategy to create economic values affects the job quality. This study addresses this gap by incorporating real options theory, a theory broadly used in the strategy field to account for how firms under uncertainty behave to create economic values, into the literature on job quality. I propose that firms are more likely to engage in non-standard employment rather than standard one when uncertainty elevates the value of real options embedded in non-standard employment. Furthermore, I suggest that the value of real options under uncertainty is contingent upon three factors—growth opportunity, competition, and union. Analyses of four-wave nationally representative panel indicate that growth opportunities and competition surrounding the firms weaken the effect of uncertainty on non-standard employment.

Does Capital Foster Growth Opportunities? A Real Options Perspective on Newly Public Family Firms

Despite significant organizational challenges, risk of failure and dilution of family control, many private family firms decide to go public with founding families retaining family control, thereby accepting a loss of noneconomic wealth. We argue that family firms may go public and accept such an initial loss of noneconomic wealth but use the proceeds to allocate funds in strategic investments that create more growth opportunities in the future, thereby financially compensating for their loss of noneconomic wealth. Building on real options theory, the aim of this study is to gain insights on the effects of new capital on growth option value in newly public firms and to develop an understanding of the family firm as a source of firm heterogeneity in real options theory. The empirical analysis of 590 IPOs in the United States lends support to our theoretical expectations and show that family firms have a distinct effect on growth option value, particularly under conditions of highly uncertain environments.

A Real Options Perspective on Pattern, Process, and Outcomes of Entrepreneurial Internationalization

Especially in this era of de-globalization, uncertainty plays a major role in both entrepreneurial and internationalization processes. Yet, prior international entrepreneurship (IE) and international business (IB) literature has not fully accounted for the nature of high and changing levels of host country uncertainty when predicting firms’ entrepreneurial internationalization patterns and outcomes. By applying real options theory (ROT), we re-conceptualize firms’ entrepreneurial internationalization pattern, process, and outcomes as the results of active uncertainty leveraging in the face of high and changing levels of host country institutional and economic uncertainty. Utilizing a representative sample of 680 U.S. new international firms that exported to 115 different host countries between the year 2009 and 2019, we find that host country uncertainty positively relates to firms’ choice of “real option” entry (i.e., low initial investment combined with high collaboration). In contrast to the predictions of Transaction Cost Economic (TCE) approaches to internationalization, a ROT approach enables firms to achieve relatively faster entry, enter more distant destinations, and allows flexibility to exit markets over time. More importantly, we discovered firms using such “real options” entry strategies can mitigate the negative performance impact of host country uncertainty.

An analysis of timing decision in venture capital staged financing: evidence from India

Purpose Staged financing is a prominent feature of the venture capital investment process. With staged financing, venture capitalists (VCs) may choose to either make an investment or delay it at each round. The purpose of this paper is to investigate the influence of market uncertainty, project-specific uncertainty and agency problems on these decisions. Design/methodology/approach The study uses data from Indian firms that received venture capital funding between 2000 and 2017. The duration between funding rounds is analysed using survival analysis. An accelerated failure time model is used to estimate the influence of market uncertainty, project-specific uncertainty and agency problems on the length of time between funding rounds. Findings VCs delay investment when there are high levels of uncertainty in the market; if market uncertainty increases by 1%, delay in funding increases by more than 6% (almost a month) on average. There is no statistically significant relationship found between the funding duration and project-specific uncertainty. Agency problems motivate VCs to invest sooner. An increase in agency problems results in a reduction of 55% (almost five months) in the length of time before the next funding round. Practical implications This study has useful business policy implications. It provides VCs with real option value drivers such as market uncertainty, agency problems, which influence the timing of decisions in staged investment processes. It will help to make the choice between investing and delaying at each round of financing more robust. Further, it is useful for VCs to differentiate between market uncertainty and agency problems against the backdrop of their different implications for staging decisions. Originality/value Few studies have examined staging decisions from a real options perspective in the context of a developed economy and very few from a developing economy perspective. This study increases understanding of staging decisions in the Indian context.

A real options perspective on corporate social responsibility: evidence using causal forest.

A real options perspective on corporate social responsibility: evidence using causal forest.

Software Patents and Firm Value: A Real Options Perspective on the Role of Innovation Orientation and Environmental Uncertainty

Our paper shows that software-based patents can contribute significantly to the value of firms. Our paper provides managers with insights into how different types of software-based innovations affect firm value in market environments exhibiting different levels of competitiveness and dynamism. Using a large-panel data set consisting of 602 U.S. firms, we find that firms with a software patent portfolio having higher levels of explorative innovation orientation achieve higher market value in environments with high competitiveness and low dynamism. By contrast, firms with a software patent portfolio exhibiting high levels of exploitative innovation orientation achieve higher market value in low competitiveness and high dynamism environments. Although some practitioners are still skeptical about the value of software patents, we provide empirical evidence that a firm’s software patents do contribute to firm performance, thereby helping practitioners to justify their investments in software innovation and assess the value of their software patents. Furthermore, our paper highlights key factors—both internal (i.e., innovation orientation) and external (i.e., environmental uncertainty)—that may affect the value of software patents. This can help firms formulate the appropriate innovation strategy for software patents that can lead to the greatest returns.

Optimal scheme in energy performance contracting under uncertainty: A real option perspective

Energy performance contracting (EPC) was developed and had ever been believed as an effective energy-saving method. Despite that a variety of schemes, Guaranteed Saving, Shared Saving, and First-Out schemes, are created to be applied in various conditions, it has not been widely adopted as expected, due to the complexity of its profit allocation, high uncertainty and investment-assessing deficiency. In order to promote the wide applications of EPC projects, Real option analysis (ROA) is applied in this paper with the attempt of seeking the optimal scheme, which could be feasible and profitable for both stakeholders. ROA is studied to be an effective tool capable of considering the uncertainty and the managerial flexibility, and of assessing the investment value. A ROA-enabled methodology is proposed and expected to (1) identify feasible options for both the energy service company and the owner, (2) evaluate the investment value using the binomial tree pricing model, (3) develop new metrics for the optimal EPC scheme, and finally (4) single out the optimal scheme that is feasible and attractive for both sides. A real EPC project is studied to test the effectiveness and applicability of the proposed approach. The Shared Saving scheme is identified as the optimal scheme for the EPC project, striking a more ideal profit difference between participants than the other two schemes. This demonstrates the capability and effectiveness of the proposed approach in optimizing the scheme into a new balance. The sensitivity of the sharing proportion on the optimal EPC scheme is discussed, and it is found that the sharing proportion of realized energy cost savings by the energy service company is positively correlated with the total investment value. The novelty of this research lies in (a) the incorporation of contractual flexibility by means of the real option into the EPC project for optimal design, and (b) new metrics for the selection of the optimal EPC scheme. The proposed model and suggestions based on the case study are supposed to help decision-makers optimize the scheme under different scenarios. A feasible and attractive EPC scheme can further prompt wide application of energy-saving projects, which in turn contributes to the improvement of energy-consuming efficiency and then to realize the environmental sustainability.

Valoração de ativos intangíveis com opções reais: estudo de caso em uma transferência de tecnologia da Universidade Federal de Minas Gerais

The aim of this study was to compare the results of the valuation of intangible assets by the real options approach, based on the Black and Scholes model, with the discounted cash flow method, in the context of a software developed at the Federal University of Minas Gerais. The flexibilities considered in the development of the work were the abandonment option and the option to extend the licensing agreement. The results showed that the real options model fits better to this scenario, since it incorporates the existing options from the moment of Research and Development until the end of the licensing and protection of the technology. The expected value from the real options perspective was statistically higher than the expected value from the traditional cash flow perspective. This result showed that the contingencies related to the case study are relevant and should be incorporated into a valuation process. The greater proximity of this value to reality represents benefits both for the university and for the company. In addition, it is important to highlight that a protected technology can create a great competitive advantage, and that the gains from the exploitation of this knowledge can go far beyond the financial ones.

Study on the Valuation Model of Mobile Content Start-ups Using Resource based View and Real Options Perspective

Study on the Valuation Model of Mobile Content Start-ups Using Resource based View and Real Options Perspective

Investment Valuation Model of Public Rental Housing PPP Project for Private Sector: A Real Option Perspective

Public rental housing (PRH) in China is mainly invested by the government at present. The huge capital demand brings it great pressure and a series of problems appear meanwhile. Public–private partnership (PPP) has been regarded as a way to solve the funding dilemma of PRH. However, the PRH project is not attractive for the private sector since the expected profit seems unsatisfactory based on traditional valuation methods. To improve this situation, this paper proposed an investment valuation model from a real option perspective. For the private sector, three types of options, including deferral option, abandonment option, and expansion option, were identified during the concession period of a PRH PPP project. On this basis, a two-stage binomial tree model was constructed for estimating the investment value. Then, the proposed model was tested in a hypothetical example of a typical PRH PPP project in Chongqing, China. The result shows that great potential value can be excavated through flexible strategies and adaption to uncertainties. This paper provides a deep analysis on the gaps of the real option application in public housing investment assessment, which is meaningful for improving the supply efficiency and financial sustainability of PRH.

The effects of social responsibility on company value: a real options perspective of Taiwan companies

Corporate social responsibility (CSR) is a subject that has garnered considerable attention in recent years. This study conducts the empirical study by using a real options perspective to examine whether a company’s CSR commitment tends to increase its market value. According to Taiwan’s CommonWealth Magazine, this study distinguishes CSR and non-CSR companies. The paper estimates and compares the real options values of CSR and non-CSR companies and shows that high percentage of the company value is attributed to real options. This study finds that a company’s commitment to fulfilling its social responsibility increases its real options value and that the higher the number of CSR Awards won by a company, the higher its real options value. Compared with 10 years ago, investors now pay more attention to companies’ CSR performance. In addition, the higher a company’s size, systematic risk, fixed asset ratio, debt ratio, or skewness in stock returns, the higher a real options value is likely to be.

Supply chain network equilibrium with strategic supplier investment: A real options perspective

This article develops a network equilibrium model that studies competing supply chain firms who can strategically invest in new capacity at suppliers under cost and demand uncertainty. We model the decision-making process of each supply chain firm as a stochastic optimization problem. We formulate the equilibrium conditions of all supply chain firms using the variational inequality theory. Analytical results establish connections from the supplier investment decisions to real put and call options. Option pricing theory is applied to show that the value of supplier capacity investment will increase if the demand uncertainty or the cost uncertainty increases, and will decrease if the price sensitivity or the cost factor increases. Numerical experiments are conducted to confirm and extend the analytical results, and to investigate the decision-making and profits of different supply chain firms in more complex and realistic settings. Our results also suggest that manufacturers should strategically invest in a portfolio of complementary suppliers with different risk characteristics that serve different purposes.

Speculative Behavior in Vacant Land Development: Evidence for Real Options in Malaysia

The development of vacant land may be seen from a real options perspective—owners of vacant land have the incentive to delay developing the land and keep their options open (keep the lands undeveloped) if they believe that future development will yield higher value. We investigate whether there is speculative behavior with regard to vacant land development in Malaysia. Using samples of 254 vacant plots of lands and 3,681 houses in Selangor, Malaysia, we find that the option premium for vacant lands ranges from 8% to 20% across all areas in Selangor. We posit that the higher option premium for vacant lands is the result of a higher level of speculation by landowners. We also find that, while the option value increases, the intrinsic value reduces the market price of the vacant land. Our findings are indicative of speculative behavior by the owners of vacant land in Malaysia.

Valuing a natural gas pipeline expansion project: A copula-TGARCH application in Mexico

<p>With the liberalization of energy prices and the opening of the energy sector to competitors in Mexico, an opportunity for new investment projects is now open. Due to the current conditions of international energy markets, such as volatility and low prices with no prospect of reversion, a need for valuation tools to better capture the risk and benefits of a project presents itself. We propose a methodology based on the volatility treatment of numerous underlying assets in a Real Options Analysis: using a TGARCH for the individual volatilities and copulas for the joint effect. The methodology is applied to a natural gas distribution project of Mexico’s State oil company Petróleos Mexicanos (PEMEX). An estimated net present value of the gas pipeline is provided, considering the real options perspective. The result of our empirical application validates the real option’s theory of a higher net present value estimation for the project when incorporating the effect of different sources of uncertainty and non-linear interdependence.</p>

The Drivers and Returns of Corporate Social Responsibility: Shocks to the Oil-Related Industries

Integrating the real options perspective into the Corporate Social Responsibility (CSR) literature, I hypothesize that a firm may withhold CSR investment when volatility and uncertainty in its envi...

Accounting for ambiguity and trust in partial outsourcing: A behavioral real options perspective

Concerned with the hidden costs of outsourcing, this paper examines the role of ambiguity and trust in partial outsourcing decisions from the perspective of real options theory. We study pricing and quantity dynamics between an ambiguity averse vendor and a less (more) trusting client in a leader-follower framework with fixed timing. We find that a client's partial outsourcing quantity increases with the vendor's ambiguity if outsourcing is meant for cost-saving purposes. Meanwhile, the effect of trust on outsourcing quantity is jointly moderated by the vendor's ambiguity and quality of shared information forecasts when cost advantages are exaggerated. In terms of pricing effects, the vendor increases (decreases) their threshold with increasing ambiguity for long-term (short-term) contracts. These insights hold under the multiple-priors and worst-case ambiguity specification. When Choquet ambiguity and rank-dependent utility are considered, more complex and subtle dynamics are obtained. Ambiguity has additional non-linear effects on outsourcing quantity due to heterogeneity in ambiguity preferences (seeking versus aversion) and probability weighting. The vendor's price not only increases (decreases) with increasing ambiguity-seeking for long-term (short-term) contracts, but also with ambiguity aversion when specific risk-return conditions are met. Trust effects are qualitatively similar under both ambiguity specifications.