Real Options Perspective Research Articles

A real options perspective on sequential acquisitions in China

We examine how firms in an emerging market address their information disadvantage in takeovers. One strategy is to complete the acquisition sequentially rather than as a one-time deal. In contrast to firms in developed economies that enjoy relatively easy access to information, emerging-market firms face differential access to information on target firms, owing to institutional weaknesses and constraints in those markets. Sequential acquisitions are conceptualized as a real-option-based strategy, whereby the sequential acquirer resolves valuation uncertainty through information gathering and learning after making a toehold purchase. The value of a sequential acquisition strategy increases for firms that are at an information disadvantage. Statistical analysis, based on 272 completed acquisitions of Chinese listed firms between 1995 and 2003, shows that the sequential method is more likely to be chosen over a single-transaction mode when the acquirer is a private firm, or when the acquirer is diversifying into a new business area. Thus we offer a new way of viewing real option strategies in emerging economies, by treating sequential acquisitions as information and learning mechanisms as opposed to tools for hedging.

Unilateral commitment in alliances: an optional behaviour

Purpose – The coordination difficulties and risks inherent to business conduct are magnified in alliance relationships, posing a greater challenge for partners. The purpose of this paper is to propose real option perspective to examine how relational risk perceptions shape commitment behaviour in biotechnology alliance relationships.Design/methodology/approach – The hypotheses are tested with survey data on 344 alliance relationships of European Biotechnology small to medium‐sized enterprises (SMEs).Findings – This paper suggests that commitment can be seen as a real option, which reduces the degree of asymmetry of information concerning a partner's behaviour. The findings stress that endogenous uncertainty makes unilateral commitment more attractive, but the conclusion does not show that it enhance perceived relationship effectiveness for the party that unilaterally commits in a unique time period.Research limitations/implications – Nevertheless, within this paper the real options logic to alliance commi...

Rethinking Lead Time Reduction Investment: A Real Options Perspective

Although it is generally agreed that companies are better off with shorter manufacturing lead times, investment in lead time reduction is often difficult to justify using traditional project valuation techniques such as net present value (NPV). In this article, we suggest that evaluating investment in lead time reduction from a real options perspective facilitates quantification of the value of manufacturing flexibility brought about by lead time reduction, particularly the value of the option to time production commitment based on better demand information. This flexibility is significant when demand is volatile. We also present examples to demonstrate how options inherent in lead time reduction can have synergistic effects with related investments, such that a combination of such investments may have positive value even when the NPV of the individual investments is negative.

Licensing duration in foreign markets: A real options perspective

Licensing can be considered an initial trial of a foreign market before a firm fully commits to it through other investment modes. The length of trial has great importance, because licensing duration represents part of the licensing agreement. When it is too short, the firm may not acquire the necessary experience and knowledge of the foreign market, but if it is too long, the firm misses optimal expansion timing. Arguing that licensing can be considered as a European-style real option with a fixed holding period, we develop and test a model of the determinants of licensing duration in foreign markets. Empirical results based on a sample of firms in various countries show that uncertainty and threat of competitive pre-emption in the foreign market are related to shorter duration of the technology licensing agreements. We also find that irreversibility of the impending investment moderates the relationships between uncertainty and duration. Specifically, market and technology uncertainties in the foreign market induce shorter contracts under low levels of irreversibility.

Corporate Venture Capital as an Exploratory Mechanism

This study analyzes the conditions under which Corporate Venture Capital (CVC) investments create growth options for the large firm. Using a real options perspective, the study hypothesizes that number of CVC investments is positively correlated to the number of growth options generated for the large firm. It is also hypothesized that the value generated from the CVC investments is higher when the CVC is undertaken through a dedicated subsidiary, when the CVC sponsoring firm has a high R&D intensity and when firms pursue international CVC investments. Results on a 8 year panel study comprising of 490 CVC investments undertaken between 1994 and 2002 suggest that number of CVC investments is positively correlated to the growth options generated for the large firm. The value generated from the CVC investments was also seen to be higher when the firms had a high R&D intensity. However, contrary to the hypothesis, the results suggested that CVC's undertaken through dedicated subsidiaries create lower value when compared to CVC's undertaken by groups which are a part of the larger corporation. Finally, implications for theory and practice are suggested.

Strategic choice during economic crisis: Domestic market position, organizational capabilities and export flexibility

This study examines how sudden shrinkage of domestic demand affects firm-level export performance. Using the Asian economic crisis as a natural experiment, we show that while the industrial organization (IO) economics and resource-based view (RBV) apply well in the pre-crisis period, the real options perspective does a better job in explaining firms’ efforts to increase exports in the post-crisis period. Specifically, using a real options perspective, we show how sudden change in domestic demand provides benefits to those firms that have invested in flexible capabilities while those firms that are locked in with inflexible resources fail to change. We find that the positive relationship between a firm's domestic market position and export intensity becomes stronger in the post-crisis than the pre-crisis period. Further, we find a positive relationship between non-location-bound flexible capabilities such as R&D and export intensity and a negative relationship between location-bound inflexible capabilities such as advertising and export intensity. These relationships become more pronounced in the post-crisis period.

The option‐creating institution: a real options perspective on economic organization

AbstractThis paper proposes a dynamic framework of economic organization called the option‐creating institution (OCI) model. The claim is made that firm, market, and hybrid governance structures emerge from the need for flexibility in an uncertain world. Each governance structure uniquely provides strategic real options that allow capitalist‐entrepreneurs, with unique risk preferences, to better organize their economic activities. The real options perspective on economic organization is developed by drawing insights from the exchange and coordination perspectives. It is proposed that this real options perspective matches practicing decision makers' intuition and that an inductive OCI model will offer a prescriptive guide. Copyright © 2008 John Wiley & Sons, Ltd.

Integrating Real Option and Dynamic Capability Theories of Firm Boundaries

Firms often acquire other firms to source technology but it is unclear why they might assume such risk by buying before a product standard is established in their industry. We draw upon real options and dynamic capability theories of firm organization to develop an integrated framework that explains why firms might acquire early and which firms are more likely to do so. We develop propositions regarding certain firm attributes as predictors of acquisition timing relative to passage of a technology standard. We argue that from a real options perspective, the primary reason firms acquire early is related to the firm’s knowledge of the technology. However, attributes such as political influence in the standardization process, prior experience making acquisitions, and how the firm resolves uncertainty about the technical expertise of potential acquisition targets are capabilities that also enter the acquisition timing decision. We provide a model based on those propositions and address how it can be empirically tested.

Duration analysis of venture capital staging: A real options perspective

This study takes a real options perspective towards venture capital staging and views the staging decision as a choice between holding the current option to invest and investing now to obtain the option to invest subsequently. It proposes that this staging decision depends on the factors that influence the value of these two options, such as competition and various sources of uncertainty. The empirical results suggest that market uncertainty encourages venture capital firms to delay investing at each round of financing, whereas competition, project-specific uncertainty and agency concerns prompt venture capital firms to invest sooner. This study has useful implications for theory and practice.

An Empirical Examination of 'Barrier to Exit': How Does an Entrepreneur-Friendly Bankruptcy Law Affect Entrepreneurship Development at a Societal Level?

Does an entrepreneur-friendly bankruptcy law encourage more entrepreneurship development at a societal level? How does bankruptcy law affect entrepreneurship development around the world? Drawing on a real options perspective, we argue that if bankrupt entrepreneurs are excessively punished for failure, they may pass potentially high-return but inherently high-risk opportunities. Amassing a longitudinal, cross-country data base from 35 countries spanning ten years, we find that a lenient, entrepreneur-friendly bankruptcy law encourages entrepreneurs to take risks and thus let entrepreneurship prosper. Components of an entrepreneur-friendly bankruptcy law are: (1) the availability of a reorganization bankruptcy option, (2) the time spent on bankruptcy procedure, (3) the cost of bankruptcy procedure, (4) the opportunity to have a fresh start in liquidation bankruptcy, (5) the opportunity to have an automatic stay of assets, (6) the opportunity for managers to remain on the job after filing for bankruptcy, and (7) the protection of creditors at the time of bankruptcy.

The Concept of Risk in RBV - An Exploratory Analysis

The resource-based view (RBV) appears as a more comprehensive theory than the neoclassical theory to explain value creation in the capitalist system. RBV emphasizes the role of strategic resources to the firm. Barney (1991) adopts the standpoint that the stock of strategic resources is important in the determination of the level of profitability of the firm. Barney (1991) proposes that, besides being valuable, resources should also possess the fundamental attributes of being rare, imperfectly imitable and nonsubstitutable. The objective of this work is to present an alternative concept for risk based on the concept of resource. The work is divided into three sections: in the first we present two methodologies to deal with risk in RBV, the perspective of the discounted cash flow and the perspective of real options. In the second we present an alternative risk concept (including the means of measuring it), which takes into consideration the level (sum) of resources essential to the company, as well as the volatility of this level. (We will apply the concept including a measure of risk for a sector where the innovative activity is essential).In the third we present a model based on behavioral finance of the behavior of the manager toward risk.

Product market competition, investment and employment-abundant versus job-poor growth: A real options perspective

The role of product market reforms in achieving the objective of higher employment and growth has recently received much attention amongst academics. The aim of this paper is to analyse some of the channels through which cross-market effects come about and to assess their policy relevance. The analytic strategy of this paper relies upon the stochastic real options modelling approach. In a nutshell, our simulations using numerical methods indicate that comprehensive product market reforms would increase factor demand and growth significantly in the medium and long run.

Southeast Asian monetary integration: a real options perspective

We examine the real option implicit in countries’ decisions of whether to join a monetary union and calibrate our theoretical model for the core ASEAN/AFTA group of Indonesia, Malaysia, Philippines, Singapore and Thailand. None of the countries would be prepared to join a monetary union amongst them at present, and most have low to negligible probabilities of ever wanting to do so.

Valuing information technology infrastructures: a growth options approach

Decisions to invest in information technology (IT) infrastructure are often made based on an assessment of its immediate value to the organization. However, an important source of value comes from the fact that such technologies have the potential to be leveraged in the development of future applications. From a real options perspective, IT infrastructure investments create growth options that can be exercised if and when an organization decides to develop systems to provide new or enhanced IT capabilities. We present an analytical model based on real options that shows the process by which this potential is converted into business value, and discuss middleware as an example technology in this context. We derive managerial implications for the evaluation of IT infrastructure investments, and the main findings are: (1) the flexibility provided by IT infrastructure investment is more valuable when uncertainty is higher; (2) the cost advantage that IT infrastructure investment brings about is amplified by demand volatility for IT-supported products and services; (3) in duopoly competition, the value of IT infrastructure flexibility increases with the level of product or service substitutability; and (4) when demand volatility is high, inter-firm competition has a lower impact on the value of IT infrastructure.

Bankruptcy Law and Entrepreneurship Development: A Real Options Perspective

We develop a real options perspective to explore how an entrepreneur-friendly bankruptcy law can encourage entrepreneurship development at the societal level. If bankrupt entrepreneurs are excessively punished for failure, they may let inherently high-risk but potentially high-return opportunities pass. We suggest that a more entrepreneur-friendly bankruptcy law, informed by a real options logic, can encourage more active and vibrant entrepreneurship development. We also discuss the implications of the role of venture capital and stigma in the effectiveness of an entrepreneur-friendly bankruptcy law.

A real options perspective of platform investments in service firms

PurposeReal options theory has been used to examine how manufacturing firms make incremental investments under conditions of uncertainty. However, it has not been extensively applied to service firms. Using real options theory, the purpose of this article is to explore how service firms make platform investments.Design/methodology/approachData come from a survey of Florida nursing homes. Several hypotheses examine the extent to which organizational characteristics, environmental scanning, internal and external slack, and entrepreneurial orientation impact the degree of investment in a portfolio of services to community based clients. Data were analyzed via ordinary least squares regression.FindingsResults indicate a positive relationship between platform investments and customer preferences and nursing home innovativeness. Risk‐taking behavior and internal slack received mixed support.Research limitations/implicationsThe study did not include measures of economic performance; therefore, it is unclear if differences in market strategies yield better financial outcomes for the nursing homes. The study was set in the nursing home industry that is a highly regulated service industry. It is possible that specific attributes of this industry impacted our results.Practical implicationsIn deciding whether an options approach to managing customer value is appropriate for any individual service firms, managers should consider that a firm's strategic posture and the availability of slack resources.Originality/valueThere has been relatively little research in the management literature that examines how firms in a service context employ strategies and tactics consistent with options theory to reduce uncertainty. This lack of research is problematic given that service firms compromise an increasing percentage of the GDP of many developed countries.

Partial outsourcing: A real options perspective

We apply a real options approach to develop a general characterization of a firm's optimal organizational mode. We find that the optimal threshold for the establishment of (partial) outsourcing is an increasing function of the underlying market uncertainty. Further, we show that increased market uncertainty induces a higher optimal proportion of outsourced production once the threshold is reached and once this threshold prescribes partial outsourcing.

Valuation of patent – a real options perspective

Both the theoretical model and the empirical analysis methods are examined for valuing patents from the real options perspective. This study not only sets up a real options approach for evaluating patent to conform to the main sensitivity analysis of patent activities, but also establishes an empirical method about valuing patents by a panel data. Cross-sectional and time-series data from 101 Taiwanese electronic firms between 1993 and 2002 are employed for the fixed effects analysis in the panel data model. This study concludes the consist results from the theoretical model and empirical analysis. That is, the patent value increases with increasing the underlying asset, time to maturity and risk-free rate.

Managing Uncertainty in a Formal Standards-Based Industry: A Real Options Perspective on Acquisition Timing

Scholars have theorized that firms can intervene in the creation of formal technology standards to reduce uncertainty and influence the outcome to their advantage. One approach is through early acquisition: Firms can acquire targets with relevant technology prior to standardization. Using real options logic, the authors show how early acquisitions can be considered a growth option under certain circumstances. They find that acquisitions are more likely to occur before the passage of the standard when (a) acquirers lacked relevant technical knowledge, (b) target firms possessed relevant technical knowledge,and (c) acquirers had a prior equity investment in the target firm.

INTERNATIONAL MANAGEMENT Conference Paper Abstracts.

Academy of Management Annual Meeting Proceedings includes abstracts of all papers and symposia presented at the annual conference, plus 6-page abridged versions of the “Best Papers” accepted for inclusion in the program (approximately 10%). Papers published in the Proceedings are abridged because presenting papers at their full length could preclude subsequent journal publication. Please contact the author(s) directly for the full papers. ArticlesINTERNATIONAL MANAGEMENT Conference Paper Abstracts.Published Online:30 Nov 2017https://doi.org/10.5465/ambpp.2005.18779029AboutSectionsPDF/EPUB ToolsDownload CitationsAdd to favoritesTrack Citations ShareShare onFacebookTwitterLinkedInRedditEmail AbstractThis section focuses on several studies presented at a conference on international management. The article, "The Impact of Trade Liberalization Policies on National Patters of Corruption and Software Piracy," focuses on the impact of trade liberalization policies on national patterns of corruption and software piracy. "Repetition of Foreign Market Entry Forms: Managerial and Organizational Drivers," studies the repetition of forms of entry in a foreign market by taking into account not only organizational factors but also the managerial risk determinants of such repetitions. "Foreign Expansion Under Uncertainty: A Strategic Real Options Perspective," investigates the expansion of 30 of the largest global manufacturing companies in 6 industries in China over the last 20 years.FiguresReferencesRelatedDetails Vol. 2005, No. 1 Permissions Metrics in the past 12 months History Published online 30 November 2017 Published in print 1 August 2005 InformationCopyright of Academy of Management Journal is the property of Academy of Management and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder’s express written permission. However, users may print, download, or email articles for individual use.KeywordsINDUSTRIAL managementFREE tradeMARKET entryEXPANSION (Business)MANAGEMENT researchLIBERALIZATION (Finance)SOFTWARE piracyORGANIZATIONAL behaviorDownload PDF