Temporary workers as real options

Firms experiencing or anticipating substantial workforce expansion face increasing pressure to accurately project the costs associated with human asset investments and potential future layoff requirements. With that in mind, the decision whether to take on temporary workers in lieu of hiring permanent employees is a decision that involves significant risk. Traditional valuation methods assume that investments are fully reversible and thus do not capture the idiosyncrasies of workforce management, in which investments are not fully reversible. However, real options theory offers managers the ability to consider irreversibility and to make workforce investment decisions under conditions of minimum uncertainty and maximum flexibility. We present real options theory as an especially useful means for managers to more accurately value human asset investment decisions, achieve expansion and defer commitment until future uncertainties can be at least partially resolved.     

Firm Productivity and the Foreign‐Market Entry Decision

We use Japanese firm‐level data to examine how a firm’s productivity affects its foreign‐market entry strategy. The firm faces a choice between exporting and foreign direct investment (FDI). In the case of FDI, the firm has two options: greenfield investment or acquisition of an existing plant (M&A). If it selects greenfield investment, it has two ownership choices: whole ownership or a joint venture with a local company. Controlling for industry‐ and country‐specific characteristics, we find that the more productive a firm is, the more likely it is to choose FDI rather than exporting and greenfield investment rather than M&A.     

Acquisitions and Real Options: The Greenfield Alternative

Although acquisitions are a popular way to enter new markets, empirical evidence tends to indicate few benefits accrue to acquiring firms. This might be the case because firms use acquisitions when they should be employing an alternative mode of expansion. Applying real options theory to this issue, we suggest that greenfield start‐up ventures provide a real option alternative to acquisitions for firms establishing new international subsidiary units. To test this notion we examine a sample of Western European firms entering the emerging economies of Eastern Europe. The evidence suggests that acquisitions are a good choice only when firms enter markets containing low demand uncertainty and when these firms possess acquisition‐based strategic flexibility. Overall, our analysis indicates that greenfield ventures appear to provide firms with a real option when making the acquisition decision.     

竞争条件下公司投资策略的期权博弈

文章认为在未来不确定的条件下投资主体可以通过推迟投资获取新的信息,减少部分关于投资的不确定性,因此,未来的不确定性隐含着推迟的期权,文章运用博弈理论分析了竞争条件下公司间的投资策略的期权博弈。     

Through the Looking‐Glass: The Impact of Regional Institutional Logics and Knowledge Pool Characteristics on Opportunity Recognition and Market Entry

This study investigates how regional variations in institutions and knowledge pools impact new firm entry into emerging industry sectors. Using the cleantech industry sector as a research context, we hypothesize and find that supportive regional institutional logics – shared meaning systems in a community that confer legitimacy upon particular goals and practices – generate cognitive schemas (mental models) that facilitate opportunity recognition and increase new firm entry rates. Drawing from research on socially situated cognition, we demonstrate that supportive institutional logics have a greater impact on new firm entry when a regional knowledge pool is larger, but a reduced impact on new firm entry when the knowledge pool is more specialized. These findings integrate previously distinct perspectives from institutional theory and knowledge economics, while contributing to research on how new industry sectors emerge.     

Entry‐Timing Advantages in Renewable Natural Resources Industries

In this paper, we explore the conditions of entry‐timing advantages in renewable natural resource industries. Drawing from behavioural theory of the firm, we classify firms in two groups depending on the different heuristics used to make entry decisions when facing the cyclical endogenous nature of these industries: crowd firms are procyclical, making decisions based on the current phase of the industry cycle, whereas anti‐crowd firms follow a countercyclical strategy, making uncertain, and risky decisions by estimation of the next phase of the cycle. Therefore, anti‐crowd firms anticipate the deployment of resources each cycle, potentially gaining entry‐timing advantages beyond those provided by traditional competitive isolating mechanisms. Through a mathematical simulation of a performance feedback model, we reveal that the entry‐timing advantage of the anti‐crowd group becomes possible when the rivalry in the industry and the price sensitivity of competitors are high, and when the time required to deploy the resources is short.     

The role of productive efficiency on entry and post‐entry performance under different strategic orientation: the case of the Greek plastics and rubber industry

The present study formulates and empirically tests the hypothesis that the post‐entry performance and growth of new firms is affected by the way in which crucial resources are combined during the decision‐making process to enter the industry or not. Further, the study empirically tests the hypothesis that multifaceted productive efficiency influences both the entry decision and the entrants' post‐entry performance. The proposed analytical framework allows for testing these hypotheses under different strategic orientations assumed to be followed by entrants. Results of the estimated partial observability model provide support to these hypotheses in almost all of the examined cases. Copyright © 2008 John Wiley & Sons, Ltd.     

Steuern und Risikobereitschaft in Modellen irreversibler Investitionen

This paper provides an overview of the literature on the influence of taxation on investment behavior under uncertainty, especially under the real options paradigm. We analyze the impact of taxation on risk-taking under irreversibility. Extending the existing literature we integrate a simple tax system into a real option model. Under irreversibility and risk neutrality, raising the tax rate can either increase or reduce risk-taking. Referring to combinations of volatility and tax rate it is possible to identify conditions for an unambiguous influence of taxes on risk-taking. Numerical simulations indicate that raising the tax rate increases risk-taking under low volatility. Implementing a final withholding tax on capital income tends to reduce risky investment. Our findings confirm the well-known results under certainty and extend them with respect to uncertainty, irreversibility, and risk-taking.     

Real Options, International Entry Mode Choice and Performance

abstract    Recent scholarship suggests that combining insights from real option theory with transaction cost economics may improve decision-making models. In response to this suggestion we develop and test a model of international entry mode choice that draws from both perspectives. Examining samples of Dutch and Greek firms entering Central and Eastern European markets, we found that adding real option variables to a transaction cost model significantly improved its explanatory power. Additionally, firms that used the combined real option/transaction cost predicted choices had significantly higher levels of subsidiary performance satisfaction than firms that did not. Our results suggest that effective managerial decision-making may involve more than mere transaction cost minimization considerations; real option value creation insights also appear to influence the success of decision outcomes.     

Does time have value? An empirical examination of the put option embedded in refundable U.S. air fares

The unprofitable history of the airline industry raises questions about how effectively airlines price their product. In this study, we use option pricing theory to examine the value of the put option embedded in refundable airline tickets. Specifically, we examine whether the time to expiration of the embedded put option is properly priced. Compiling daily real-time ticket price data for Delta and Southwest over 3.5 months, we find little evidence to suggest that airlines price the value of time in the embedded put option. However, we do find evidence suggesting that options are priced higher on business-dominated routes than on vacation-dominated routes.     

Rational plunging and the option value of sequential investment: The case of petroleum exploration

The potential to invest sequentially in related assets creates a tradeoff between diversification and concentration. Loading a portfolio with correlated assets has the potential to inflate variance, but also creates information spillovers and real options that may augment total return and mitigate variance. We examine this tradeoff in the context of petroleum exploration. Using a simple model of geological dependence, we show that the value of learning options creates incentives for investors to plunge into dependence; i.e., to assemble portfolios of highly correlated exploration prospects. Risk-neutral and risk-averse investors are distinguished not by the plunging phenomenon, but by the threshold level of dependence that triggers such behavior. Aversion to risk does not imply aversion to dependence. Indeed the potential to plunge should be larger for risk-averse investors than for risk-neutral investors. We test the empirical validity of our theory by examining bidding activity in petroleum lease sales. We find significant plunging behavior across a broad sample of oil companies. We also find that privately-held firms pursue even more concentrated (less diversified) prospect portfolios than publicly-held firms—which we attribute to risk aversion rather than size.     

Investment decisions in manufacturing: assessing the effects of real oil prices and their uncertainty

We investigate the effects of real oil prices and their uncertainty on investment decisions. Making use of plant‐level data, we estimate dynamic, discrete‐choice models that allow modeling investment inaction, under different assumptions related to initial conditions and unobserved heterogeneity. We find that increases in real oil price changes and in real oil price uncertainty significantly reduce the likelihood of investment action, in line with the predictions of irreversible investment theory. We also document that investment decisions exhibit strong, pure state dependence and are also significantly affected by initial conditions. Copyright © 2012 John Wiley & Sons, Ltd.     

The moderating effect of environmental uncertainty on the relationship between real options and technological innovation in high-tech firms

In the past decade, management scholars have applied aspects of real options theory to organizational settings, considering it an approach to enhancing strategic flexibility in the firm. They have also recognized that technological innovation is a critical mechanism through which high-tech firms try to secure a place in the competitive world of the future. Uncertainty about the environment makes it very important to analyze both factors, since the use of real options obligates managers to reflect constantly on future scenarios for which they will have to propose innovative solutions. This paper attempts to apply the theory of real options to innovation theory to propose a model in which real options reasoning improves the level of product/process technological innovation. We argue that this improvement will increase when the environment's level of uncertainty is higher. The proposal is supported empirically by a study performed on a sample of technology firms from different countries in the European Union.     

Assessment of decision-making regarding market entry/exit for technology innovation

Based on the real options approach, this work intends to assess a firm’s strategy regarding the decision-making of either entering the market which requires technology innovation or leaving the market without technology innovation. Moreover, this work applies the discounted factor to discuss the intervals among different decision values and evaluate the relative timeframe with respect to the project values. Hence, this study intends to provide a mathematical model to assess the entry and exit thresholds in respect of the most optimum technology innovation for maximizing the firm value.     

The role of spatial scale in the timing of uncertain environmental policy

The spatial scale of an environmental problem is dictated by boundaries. Physical boundaries limit the extent of impacts while the scale of decision making creates perceived boundaries beyond which impacts are ignored by decision makers. While it is well understood that uncertainty and irreversibility will alter policy decisions aimed at alleviating environmental impacts, the effect of spatial scales, both physical and perceived, is less understood. When spatial scale is included in a real options model of environmental policy adoption results indicate that the importance and influence of spatial considerations depends on the level of uncertainty, stringency of the proposed policy and flexibility of the policy decision. Recognizing spatial scale may force policy adoption to take place within a window of current damage. When spatial scale is small or uncertainty high, this window for policy adoption can close precluding policy adoption entirely. This undermines well-known results demonstrating that changes in uncertainty will only alter the timing of policy adoption. In other instances, the policy adoption window remains open but the option value increases faster than the benefits of the policy creating a scenario where it is always preferable to delay. Here the inclusion of an option value can prevent adoption of policies that would be adopted according to traditional cost-benefit analysis. In general policy decisions will be most affected by spatial considerations when the spatial scale is small, damage is spreading fast, and the uncertainty in damage spread is high.     

Do Firms Increase Productivity in Order to Become Exporters?*

Recent studies find that exporters are more productive than non‐exporters and that entry into exporting does not increase firms’ productivity. Thus, firms self‐select into foreign markets. This paper examines productivity before entry into exporting. Using Chilean plant‐level data, we find that productivity and investment increase before plants begin to export. Moreover, productivity of entrants to exporting, but not that of non‐exporters and exporters, increases in response to increases in foreign income, before entry but not after that. The results suggest that the productivity advantage of future exporters may be the result of firms increasing their productivity in order to export.     

Real options game models of R&D competition between asymmetric firms with spillovers

Using real options game models, we consider the characterization of strategic equilibria associated with an asymmetric Research and Development (R&D) race between an incumbent firm and an entrant firm in the development of a new innovative product under market and technological uncertainties. The random arrival time of the discovery of the patent protected innovative product is modeled as a Poisson process. Input spillovers on the R&D effort are modeled by the change in the leader’s hazard rate of success of innovation upon the follower’s entry into the R&D race. Asymmetry between the two competing firms include sunk costs of investment, stochastic revenue flow rates generated from the product, and hazard rates of arrival of success of R&D efforts of the two firms. Under asymmetric duopoly, we obtain the complete characterization of the three types of Markov perfect equilibria (sequential leader–follower, preemption and simultaneous entry) of the firms’ optimal R&D entry decisions with respect to various sets of model parameters. Our model shows that under positive input spillover, preemptive equilibrium does not occur in the R&D race due to the presence of dominant second mover advantage. The two firms choose optimally to enter simultaneously if the sunk cost asymmetry is relatively small; otherwise, sequential equilibrium would occur. When the initial hazard rate is low relative to the level of input spillover, simultaneous entry would occur as an optimal decision, signifying another scenario of dominant second mover advantage. On the other hand, when the initial hazard rate is sufficiently high so that the first mover advantage becomes more significant, simultaneous equilibrium does not occur even under high level of positive input spillover.     

期权的应用与房地产项目投融资探析

房地产项目投资具有较大风险和不确定性,运用传统投资评价方法不能挖掘项目的不确定性所带来的价值。文章引入实物期权理论,并通过净现值法和实物期权法对房地产投资决策案例进行对比分析,得出在较高不确定性环境下,实物期权理论能够挖掘项目潜在的价值,更加符合经济活动的要求。     

Investment and Uncertainty: A Theory‐based Empirical Approach*

This paper provides empirical evidence on the dynamic effects of uncertainty on firm‐level capital accumulation. A novelty in this paper is that the firm‐level uncertainty indicator is motivated and derived from a theoretical model, the neoclassical investment model with time to build. This model also serves as the base for the empirical work, where an error‐correction approach is employed. I find a negative effect of uncertainty on capital accumulation, both in the short run and the long run. This outcome cannot be explained by the model alone. Instead, the results suggest that the predominant mechanism at work stems from irreversibility constraints.