Sequential American Exchange Property Options

Property development activities often occur in stages, which are appropriately modeled as sequential American exchange property options, where there are interim expenditures required in order to keep the property development options “alive”. Normally American exchange options require a numerical solution, but herein there is a new closed-form approximate solution, which is computationally efficient and accurate. This method combines repeats of Margrabe European exchange and Geske compound option solutions with tight upper boundaries of either American perpetuities or European exchange options with a high volatility. Illustrations are provided of the sensitivity of the real sequential options and optimal timing to changes in several parameters, which provide a framework for property policy (tax, subsidy and regulatory) guidelines and for property development strategy evaluation. There are several plausible applications of these real option models in commercial and residential property development, within commercial property leases, with regard to switching tenants, and agricultural alternatives.     

Do Tighter Restrictions on Density Retard Development?

Williams (1991) builds a real-options model to investigate the timing and the scale decisions of property development. Williams asserts that tighter restrictions on density retard development. This article finds that there are some typos in Williams’s article such that his assertion does not hold in general. In particular, his assertion will not hold as long as the density restrictions are not set too low relative to the density level that would be chosen by landowners in the absence of any regulation.     

Analyzing firms' strategic investment decisions in a real options' framework

Within the context of investment under uncertainty, the real options literature has led to models that capture primarily the time to wait flexibility of monopolistic corporations' investment decision. In this paper, we propose an approach which relies on barrier options to model production and/or sales delocalization flexibility for multinational enterprises making decisions under exchange rate uncertainty. We then extend the model by introducing game theoretic considerations to show how the information set and the competitive structure of the market may lead firms to act strategically and exercise their delocalization options preemptively at an endogenously fixed exchange rate barrier.     

The timing of mergers along the production chain,capital structure,and risk dynamics

I demonstrate that the timing of vertical mergers is generally dependent on industry characteristics. My predictions are consistent with empirically observed patterns of vertical mergers. I show that merger activity during economic upturns tends to be motivated by operating efficiencies, while merger activity during economic downturns tends to occur as a means of keeping production chain operational. Mergers allow firms to capture synergies and improve efficiencies in order to survive economic contractions. The pricing framework implies that a vertical merger decision usually reduces risk during two different economic states.     

Stickiness of Rental Rates and Developers’ Option Exercise Strategies

In this study we incorporate sticky rents into a real options model to rationalize the widely documented overbuilding puzzle in real estate markets. Given the assumption that developers’ objective function is to maximize total revenue by selecting an optimal occupancy level, our model provides a better explanation of the phenomena we observed in the real world than the traditional market-clearance based real options models. We also show that developers’ exercise strategies can be affected by the size and the type of property markets. In other words, developers’ exercise strategies could differ among markets and under different conditions. Submitted to Cambridge—Maastricht 2005 Symposium.     

Can real options explain financing behavior?

Trade-off models commonly invoke financial transaction costs in order to explain observed leverage fluctuations. This paper offers an alternative explanation based on real options. The model is frictionless on the financing side but incorporates irreversibility and fixed costs of investment. Results obtained from simulating the model are broadly consistent with observed financing patterns. Market leverage ratios are negatively related to profitability, mean-reverting, and depend on past stock returns. The gradual and lumpy leverage adjustments can occur in the absence of financial transaction costs. This evidence shows that incorporating real frictions into structural models increases their explanatory power.     

The market premium for the option to close: evidence from Australian gold mining firms

This study shows the market value of gold mining firms contains a premium for the option to close. The sample uses 41 gold mining producers listed on the Australian Stock Exchange from 1987 to 2013. The premium of the market price over the present value of cash flows is isolated and a pooled cross‐sectional regression tests the degree of association between that premium and theoretical option premiums. The results show market prices incorporate a premium reflecting the option to temporarily close operations. The magnitude of the option premium to close depends on whether firms are out or in the money options.     

Taxation on Land Value and Development When There Are Negative Externalities from Development

This article employs a real options framework to investigate the design of taxation on both land value and development in a competitive real estate market. We assume that developed properties reduce open space, and thereby harm urban residents. However, ignoring this negative externality, landowners will develop properties sooner than is socially optimal. A regulator can correct this tendency by imposing a positive tax on development or a negative tax on land value. Alternatively, the regulator can implement both instruments simultaneously, in which case an increase in the tax rate on development will be accompanied by an increase in the tax rate on land value, and vice versa.

Office Construction in Singapore and Hong Kong: Testing Real Option Implications

We advance the real-option-based empirical analysis of commercial real estate investment in three respects. First, we test several real option implications for real estate construction that have not been examined in the commercial real estate investment literature. In particular and in line with the predictions of real option models, we show that the effects of real interest rate and the expected demand growth on hurdle rent become more negative when the market volatility is greater. Second, we use a cointegrating vector of office employment and office stock to provide a better control of the demand for new construction than traditional indicators based on real estate prices and vacancy rates. Third, whereas the existing studies focus on the U.S. commercial real estate markets, we study two major office markets in Asia, namely Singapore and Hong Kong. We rely on the local stock market in the two city states to derive forward-looking measures of office demand growth expectations.

Exploitation versus exploration in multinational firms: Implications for the future of international business

Given the economic weight of multinational corporations and their privileged access to resources, many different scenarios can be built about the future of international business and about the future impact of international business on economic, technological, and social development. In this paper, we argue that multinationals do not form a uniform organisational population, and we provide empirical evidence of the existence of traditional, rigid entities seeking benefits from low-risk exploitative strategies on one hand, and of flexible multinationals seeking higher performance levels by balancing the trade-offs between exploration and exploitation on the other hand. As these two sub-populations compete with one another for resources, we use a population ecology perspective to study likely ecological scenarios for the future. Our conclusion is that traditional multinationals tend to prevail over flexible multinationals, and the conditions required for a future society to allow a genuine growth of flexible multinationals are unlikely. This implies that multinationals remain primarily exploitative, and that as such, they will only be associated with marginal economic, technological, and social developments in the future. Other organisational forms, such as entrepreneurial small business and communities of practices are shown to be much more likely vehicles through which society can progress and innovate.     

基于实物期权理论的企业设计创新投资时机研究

产品的设计创新已经成为企业培养和维持核心竞争优势的关键。已有文献较少基于经济管理的视角来探讨不确定条件下企业设计创新所具有的实物期权特性,且传统的 DCF 无法对管理决策柔性做出科学的评价。为此,根据实物期权理论,构建企业设计创新的投资时机模型,并利用案例证明该模型的科学性和可行性。结果表明,企业在 DCF 分析的同时,应充分考虑企业设计创新的投资期权价值,把握最佳投资时机,实现科学决策。     

Trust,happiness, and households’ financial decisions

A recent line of research highlights trust as an important element guiding the decision of households to invest into risky financial assets and insurance products. This paper contributes to this literature by identifying happiness as another key driver of the same decision. Using detailed survey data from a sample of Dutch households, we show that the impact of happiness on households’ financial decisions works in the opposite direction and is more economically important compared to trust. Specifically, happiness leads to a lower probability of investing into risky financial assets and having insurance, while trust has the usual positive effect found in the literature. Furthermore, the negative effect of happiness on the ownership of risky financial assets is about 6% higher compared to the positive equivalent of trust. Similarly, the negative effect of happiness on the ownership of insurance is 3% higher than the positive effect of trust.     

What Does the CAPM Say About Operating Leverage?

We examine the issue of operating leverage and firm value. Johnstone (2020), in this issue, questions existing results which indicate that higher operating leverage results in lower firm value. We agree with Johnstone (2020) that this result is to be questioned and present a number of arguments which indicate that operating leverage is irrelevant to the valuation of the firm in the context of the CAPM model.     

Domestic and International Equity REIT Joint Ventures: Structuring Corporate Options

We examine a sample of 185 Joint Ventures parented by publicly-traded Equity Real Estate Investment Trusts 1994–2001. These transactions are found to be motivated by a wide variety of corporate strategies. Shareholder returns for REIT parents are significantly positive, which is consistent with wealth effects previously reported for joint ventures formed by non-REIT real estate firms. In a subsample of joint ventures formed to structure partial dispositions of property, however, abnormal returns are significantly negative, which is consistent with the free cash flow theory of Jensen. REIT joint venture experience in Asia has been neutral for value, but may improve in the future if early ventures have created options for more efficient partnerships later.     

To Invest or not to Invest: A real options approach to FDIs and tax competition

Foreign investment decisions of firms are often characterized by investment irreversibility, uncertainty, and the ability to choose the optimal timing of foreign investments. We embed these characteristics into a real option theory framework to analyze international competition among countries to attract mobile investments when firms, after the investment is sunk, can shift profit to low tax countries by transfer pricing. We find that an increase in the uncertainty of profit income reduces the equilibrium tax rates, whilst lower investment costs or larger profits, counteracts the negative fiscal externality of tax competition leading to higher equilibrium tax rates. JEL Code H25