Economics, Econometrics and Finance › Finance

Capital Investment and Risk Analysis

Works Count: 32763

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This cluster of papers focuses on the application of real options theory in investment strategies, particularly in the context of uncertainty, R&D competition, renewable energy investments, and technology adoption. It explores the use of real options for strategic decision making, risk management in information technology projects, and capital budgeting. The cluster also delves into the evaluation of projects and games theory within the framework of real options.

Keywords

Real Options; Investment Under Uncertainty; Strategic Decision Making; R&D Competition; Renewable Energy Investments; Information Technology Risk Management; Capital Budgeting; Technology Adoption; Project Evaluation; Game Theory

Investment and the Valuation of Firms When There is an Option to Shut Down

1985-06-01

Robert L. McDonald , Daniel R. Siegel

An important lesson from elementary microeconomics is that a plant should be shut down if operating revenues are less than variable costs. This simple production rule has implications -which have … An important lesson from elementary microeconomics is that a plant should be shut down if operating revenues are less than variable costs. This simple production rule has implications -which have received little attentionfor the initial decision to build the plant.2 This paper develops and studies a methodology for valuing risky investment projects, where there is an option to temporarily and costlessly shut down production (with no effect on future prices and costs) whenever variable costs exceed operating revenues. It is obvious that future revenues or costs must be uncertain if the shut-down option is to affect the investment decision otherwise, it is always known ex ante whether the plant is to be operated. Uncertainty is introduced in this paper by supposing that prices and costs follow a continuous time stochastic process.3 The firm in our model is a risk-neutral, price-taking value maximizer, which is owned by risk-averse investors. Risk aversion thus influences the investment decision by affecting the cost of capital faced by the firm. This is in contrast to the model in Sandmo [1971], in which the firm maximizes the utility of profits.4 Our treatment is descriptive of value-maximizing, publicly-owned firms and is widely used in the finance literature. The economics literature studying the effect of uncertainty on firm behavior has, however, tended to follow Sandhmo. The explicit modelling of the shut-down option and our treatment of risk aversion give us results that differ from those obtained by others who have studied the valuation of risky projects. Our principal results are: 1) Increases in the variance of the output price can either raise or lower the

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Dynamic Investment Models and the Firm's Financial Policy

1994-04-01

Stephen Bond , Costas Meghir

In this paper we investigate the sensitivity of investment to the availability of internal funds using the hierarchy of finance approach to corporate finance. We characterize the empirical implications of … In this paper we investigate the sensitivity of investment to the availability of internal funds using the hierarchy of finance approach to corporate finance. We characterize the empirical implications of this approach for dynamic investment models and test these implications using firm-level data. The model we estimate is based on the Euler equation for optimal capital accumulation in the presence of convex adjustment costs. The theoretical model explicitly allows for debt finance and financial assets. The empirical investigation uses U.K. company panel data to estimate dynamic investment models using GMM and tests the derived implications.

Real options: Managerial flexibility and strategy in resource allocation

1996-09-01

Graham A. Davis

Real options: managing strategic investment in an uncertain world

1999-06-01

Martha Amram , Nalin Kulatilaka

Martha Amram and Nalin Kulatilaka suggest a smarter new way to think about strategic investments in terms of real options. By applying options thinking - the concept underlying the recent … Martha Amram and Nalin Kulatilaka suggest a smarter new way to think about strategic investments in terms of real options. By applying options thinking - the concept underlying the recent Nobel Prize-winning work on financial options - to the evaluation of nonfinancial assets, this innovative approach brings a financial market discipline to the evaluation of a company's opportunities. Using real options theory, managers can more effectively target crucial opportunities to redeploy, delay, modify, or even abandon capital-intensive projects as events unfold. Corporate executives in finance, investments, and project management should share this book with decision makers in information technology, strategic planning, corporate restructuring, venture capital, and law.

A One-Factor Model of Interest Rates and Its Application to Treasury Bond Options

1990-01-01

Fischer Black , Emanuel Derman , William W. Toy

(1990). A One-Factor Model of Interest Rates and Its Application to Treasury Bond Options. Financial Analysts Journal: Vol. 46, No. 1, pp. 33-39. (1990). A One-Factor Model of Interest Rates and Its Application to Treasury Bond Options. Financial Analysts Journal: Vol. 46, No. 1, pp. 33-39.

Extreme Values, Regular Variation and Point Processes

1987-01-01

Sidney I. Resnick

The valuation of compound options

1979-03-01

Robert Geske

Operating Flexibility, Global Manufacturing, and the Option Value of a Multinational Network

1994-01-01

Bruce Kogut , Nalin Kulatilaka

The multinational corporation is a network of activities located in different countries. The value of this network derives from the opportunity to benefit from uncertainty through the coordination of subsidiaries … The multinational corporation is a network of activities located in different countries. The value of this network derives from the opportunity to benefit from uncertainty through the coordination of subsidiaries which are geographically dispersed. We model this coordination as the operating flexibility to shift production between two manufacturing plants located in different countries. A stochastic dynamic programming model treats explicitly this flexibility as equivalent to owning an option, the value of which is dependent upon the real exchange rate. The model is extended to analyze hysteresis effects and within-country growth options. We show that the management of across-border coordination has led to changes in the heuristic rules used for performance evaluation and transfer pricing.

Investment Analysis and Portfolio Management.

1979-12-01

Buckner A. Wallingford , Frank K. Reilly

The purpose of this book is to help you learn how to manage your money to derive the maximum benefit from what you earn. Mixing investment instruments and capital markets … The purpose of this book is to help you learn how to manage your money to derive the maximum benefit from what you earn. Mixing investment instruments and capital markets with the theoretical detail on evaluating investments and opportunities to satisfy risk-return objectives along with how investment practice and theory is influenced by globalization leaves readers with the mindset on investments to serve them well. The material is intended to be rigorous and empirical yet not overly quantitative. We continue with unparalleled international coverage, newly rewritten and reorganized derivatives material to be more intuitive and clearer, three additional chapters on derivatives pricing for those who want more detail, rewritten material on multifactor models of risk and return, and new CFA problems for more practice on computations concerning investment decisions. To manage money and investments, one needs to learn about investment alternatives and develop a way of analyzing and thinking about investments that will be of benefit and allow a foundation as new tools and investment opportunities become available. Reilly/Brown provide the best foundation, used extensively by professionals, organizations, and schools across the country. A great source for those with both a theoretical and practical need for investment expertise.

Measuring strategic performance

1986-09-01

Balaji S. Chakravarthy

Abstract This paper demonstrates the inadequacy of traditional measures, that are based on a firm's profitability, for evaluating its strategic performance. Two other measures, one that attempts to assess the … Abstract This paper demonstrates the inadequacy of traditional measures, that are based on a firm's profitability, for evaluating its strategic performance. Two other measures, one that attempts to assess the quality of a firm's transformations (and not merely its outcomes) and the other that attempts to measure the satisfaction of all of the firm's stakeholders (and not merely its stockholders), are shown here to be important discriminators of strategic performance. The performances of seven ‘excellent’ firms from the computer industry, featured in the recent book by Peters and Waterman, are contrasted with that of seven ‘non‐excellent’ firms from the same industry, to develop a framework for measuring strategic performance.

The effects of price and cost uncertainty on investment

1972-10-01

Richard Hartman

Investment and Hysteresis

1992-02-01

Avinash Dixit

It seems that firms behave contrary to the standard economic theory of investment. We observe that firms do not invest as soon a price rises above long-run average cost; instead … It seems that firms behave contrary to the standard economic theory of investment. We observe that firms do not invest as soon a price rises above long-run average cost; instead firms wait until price rises substantially above long-run average cost. On the downside, firms stay in business for lengthy periods while absorbing operating losses, and price can fall substantially below average variable cost without inducing disinvestment or exit. Recent developments in the theory of investment under uncertainty offer an interesting new explanation. The new approach builds on an interesting analogy between real investments and options in financial markets: In the timing of investment, waiting has positive value because time brings more information about the future prospects of a project. This new approach suggests that textbook pictures of the dynamics of a competitive industry need to be substantially redrawn. More generally, it says that a great deal of inertia is optimal when dynamic decisions are being made in an uncertain environment.

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Unraveling the resource‐based tangle

2003-06-01

Margaret A. Peteraf , Jay B. Barney

Abstract Resource‐based theory (RBT) is a prime example of a theory that integrates a management perspective with an economics perspective. As such, its challenge is to keep its arguments logically … Abstract Resource‐based theory (RBT) is a prime example of a theory that integrates a management perspective with an economics perspective. As such, its challenge is to keep its arguments logically consistent and clear, despite the risk of their becoming entangled, due to competing and possibly conflicting theoretical influences. We argue, in this paper, that to meet this challenge, it is essential to understand the limits to the domain of RBT. Unless RBT is understood as a resource‐level and efficiency‐oriented analytical tool, its contribution cannot be understood and appreciated fully. Incorporating aspects of economic theory that fall outside this domain will not increase its power and will only add to the confusion. Continued efforts to increase the analytic precision of RBT and to elaborate its economic logic, however, are worthwhile pursuits. To these aims, then, we provide a sharper definition of competitive advantage, linking this term to value creation and to demand side concerns. Similarly, we provide an economically meaningful definition of value and more precise definitions of critical resources and of economic rents. This allows us to trace a clearer trail of logic, consistent with both the management and the economics perspectives, leading from critical resources to the generation of rents. Copyright © 2003 John Wiley & Sons, Ltd.

Principles on the Benefits of Manufacturing Process Flexibility

1995-04-01

William Chester Jordan , Stephen C. Graves

Increasing manufacturing flexibility is a key strategy for efficiently improving market responsiveness in the face of uncertain future product demand. Process flexibility results from being able to build different types … Increasing manufacturing flexibility is a key strategy for efficiently improving market responsiveness in the face of uncertain future product demand. Process flexibility results from being able to build different types of products in the same plant or production facility at the same time. In Part I of this paper, we develop several principles on the benefits of process flexibility. These principles are that 1) limited flexibility (i.e., each plant builds only a few products), configured in the right way, yields most of the benefits of total flexibility (i.e., each plant builds all products) and 2) limited flexibility has the greatest benefits when configured to chain products and plants together to the greatest extent possible. In Part II, we provide analytic support and justification for these principles. Based on a planning model for assigning production to plants, we demonstrate that, for realistic assumptions on demand uncertainty, limited flexibility configurations (i.e., how products are assigned to plants) have sales benefits that are approximately equivalent to those for total flexibility. Furthermore, from this analysis we develop a simple measure for the flexibility in a given product-plant configuration. Such a measure is desirable because of the complexity of computing expected sales for a given configuration. The measure is ∏(M*), the maximal probability over all groupings or sets of products (M) that there will be unfilled demand for a set of products while simultaneously there is excess capacity at plants building other products. This measure is easily computed and can be used to guide the search for good limited flexibility configurations.

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Efficient Analytic Approximation of American Option Values

1987-06-01

Giovanni Barone‐Adesi , Robert E. Whaley

ABSTRACT This paper provides simple, analytic approximations for pricing exchange‐traded American call and put options written on commodities and commodity futures contracts. These approximations are accurate and considerably more computationally … ABSTRACT This paper provides simple, analytic approximations for pricing exchange‐traded American call and put options written on commodities and commodity futures contracts. These approximations are accurate and considerably more computationally efficient than finite‐difference, binomial, or compound‐option pricing methods.

The pricing of commodity contracts

1976-01-01

Fischer Black

Hysteresis, Import Penetration, and Exchange Rate Pass-Through

1989-05-01

Avinash Dixit

Journal Article Hysteresis, Import Penetration, and Exchange Rate Pass-Through Get access Avinash Dixit Avinash Dixit Princeton University Search for other works by this author on: Oxford Academic Google Scholar The … Journal Article Hysteresis, Import Penetration, and Exchange Rate Pass-Through Get access Avinash Dixit Avinash Dixit Princeton University Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 104, Issue 2, May 1989, Pages 205–228, https://doi.org/10.2307/2937845 Published: 01 May 1989

Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases

1988-08-01

James L. Paddock , Daniel R. Siegel , James L. Smith

This paper extends financial option theory by developing a methodology for the valuation of claims on a real asset: an offshore petroleum lease. Several theoretical and practical problems, not present … This paper extends financial option theory by developing a methodology for the valuation of claims on a real asset: an offshore petroleum lease. Several theoretical and practical problems, not present in applying option pricing theory to financial assets, are addressed. Most importantly, we show the necessity of combining option pricing techniques with a model of equilibrium in the market for the underlying asset (petroleum reserves). The advantages of this approach over conventional discounted cash flow techniques are emphasized. The methodological development provides important insights for both company behavior and government policy. Promising empirical results are reported.

The Internet of Things (IoT): Applications, investments, and challenges for enterprises

2015-05-02

In Lee , Kyoochun Lee

Entry and Exit Decisions under Uncertainty

1989-06-01

Avinash Dixit

A firm's entry and exit decisions when the output price follows a random walk are examined. An idle firm and an active firm are viewed as assets that are call … A firm's entry and exit decisions when the output price follows a random walk are examined. An idle firm and an active firm are viewed as assets that are call options on each other. The solution is a pair of trigger prices for entry and exit. The entry trigger exceeds the variable cost plus the interest on the entry cost, and the exit trigger is less than the variable cost minus the interest on the exit cost. These gaps produce "hysteresis." Numerical solutions are obtained for several parameter values; hysteresis is found to be significant even with small sunk costs.

Strategic assets and organizational rent

1993-01-01

Raphael Amit , Paul J. H. Schoemaker

Abstract We build on an emerging strategy literature that views the firm as a bundle of resources and capabilities, and examine conditions that contribute to the realization of sustainable economic … Abstract We build on an emerging strategy literature that views the firm as a bundle of resources and capabilities, and examine conditions that contribute to the realization of sustainable economic rents. Because of (1) resource‐market imperfections and (2) discretionary managerial decisions about resource development and deployment, we expect firms to differ (in and out of equilibrium) in the resources and capabilities they control. This asymmetry in turn can be a source of sustainable economic rent. The paper focuses on the linkages between the industry analysis framework, the resource‐based view of the firm, behavioral decision biases and organizational implementation issues. It connects the concept of Strategic Industry Factors at the market level with the notion of Strategic Assets at the firm level. Organizational rent is shown to stem from imperfect and discretionary decisions to develop and deploy selected resources and capabilities, made by boundedly rational managers facing high uncertainty, complexity, and intrafirm conflict.

Strategy through the Option Lens: An Integrated View of Resource Investments and the Incremental-Choice Process

1993-10-01

Edward H. Bowman , Dileep Hurry

This article develops an option-theoretic perspective for organizational strategic management. Grounded in the basic intuition that people seek to “keep options open” in situations that involve an unforeseeable future, and … This article develops an option-theoretic perspective for organizational strategic management. Grounded in the basic intuition that people seek to “keep options open” in situations that involve an unforeseeable future, and supported by theory in financial economics, this view is a recent development in strategy. The theory integrates resource allocation, sense making, organizational learning, and strategic positioning in a unified framework, and it provides a new explanation for some counterintuitive empirical findings.

Does Implementing an Effective TQM Program Actually Improve Operating Performance? Empirical Evidence from Firms That Have Won Quality Awards

1997-09-01

Kevin B. Hendricks , Vinod R. Singhal

This study explores the hypotheses that implementing effective total quality management (TQM) programs improves the operating performance of firms. The winning of quality awards is used as a proxy for … This study explores the hypotheses that implementing effective total quality management (TQM) programs improves the operating performance of firms. The winning of quality awards is used as a proxy for the effective implementation of TQM programs. Changes in various performance measures for a test sample of quality-award winners are compared against a sample of control firms. Our statistical tests provide strong evidence that firms that have won quality awards outperform the control firms on operating income-based measures. Over a 10-year period, from 6 years before to 3 years after the year of winning the first quality award, the mean (median) change in the operating income for the test sample is 107% (48%) higher than that of the control sample. There is reasonably strong evidence that firms that have won quality awards do better on sales growth than the control firms. Over the 10-year period, the mean (median) change in sales for the test sample is 64% (24%) higher than that of the control sample. We also find weak evidence that firms in our test sample are more successful in controlling costs when compared with the firms in the control sample. In addition, the results indicate that firms in our test sample increased their capital expenditures more than the control sample over the time period prior to winning quality awards. Compared with the control sample, the test sample shows higher growth in both employment and total assets.

Joint Ventures and the Option to Expand and Acquire

1991-01-01

Bruce Kogut

This article develops the perspective that joint ventures are created as real options to expand in response to future technological and market developments. The exercise of the option is accompanied … This article develops the perspective that joint ventures are created as real options to expand in response to future technological and market developments. The exercise of the option is accompanied by an acquisition of the venture. It is hypothesized that the timing of the acquisition should be triggered by a product market signal indicating an increase in the venture's valuation. Based on a sample of 92 manufacturing joint ventures, this hypothesis is tested by estimating the effect of product market signals on the hazard of acquisition. The results indicate that unexpected growth in the product market increases the likelihood of acquisition; unexpected shortfalls in product shipments have no effect on the likelihood of dissolution. This asymmetry in the results strongly supports the interpretation of joint ventures as options to expand.

Evaluating Natural Resource Investments

1985-01-01

Michael J. Brennan , Eduardo S. Schwartz

Notwithstanding impressive advances in the theory of finance over the past 2 decades, practical procedures for capital budgeting have evolved only slowly. The standard technique, which has remained unchanged in … Notwithstanding impressive advances in the theory of finance over the past 2 decades, practical procedures for capital budgeting have evolved only slowly. The standard technique, which has remained unchanged in essentials since it was originally proposed (see Dean 1951; Bierman and Smidt 1960), derives from a simple adaptation of the Fisher (1907) model of valuation under certainty: under this technique, expected cash flows from an investment project are discounted at a rate deemed appropriate to their risk, and the resulting present value is compared with the cost of the project. This standard textbook technique reflects modern theoretical developments only insofar as estimates of the discount rate may be obtained from crude application of single period asset pricing theory (but see Brennan 1973; Bogue and Roll 1974; Turnbull 1977; Constantinides 1978). The inadequacy of this approach to capital budgeting is widely acknowledged, although not widely discussed. Its obvious deficiency is its The evaluation of mining and other natural resource projects is made particularly difficult by the high degree of uncertainty attaching to output prices. It is shown that the techniques of continuous time arbitrage and stochastic control theory may be used not only to value such projects but also to determine the optimal policies for developing, managing, and abandoning them. The approach may be adapted to a wide variety of contexts outside the natural resource sector where uncertainty about future project revenues is a paramount concern.

Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have

1984-07-01

Stewart C. Myers , Nicholas Majluf

This paper considers a firm that must issue common stock to raise cash to undertake a valuable investment opportunity. Management is assumed to know more about the firm's value than … This paper considers a firm that must issue common stock to raise cash to undertake a valuable investment opportunity. Management is assumed to know more about the firm's value than potential investors. Investors interpret the firm's actions rationally. An equilibrium model of the issue-invest decision is developed under these assumptions.The model shows that firms may refuse to issue stock, and therefore may pass up valuable investment opportunities.The model suggests explanations for several aspects of corporate financing behavior, including the tendency to rely on internal sources of funds, and to prefer debt to equity if external financing is required. Extensions and applications of the model are discussed.

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The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging

1997-07-01

Eduardo S. Schwartz

ABSTRACT In this article we compare three models of the stochastic behavior of commodity prices that take into account mean reversion, in terms of their ability to price existing futures … ABSTRACT In this article we compare three models of the stochastic behavior of commodity prices that take into account mean reversion, in terms of their ability to price existing futures contracts, and their implication with respect to the valuation of other financial and real assets. The first model is a simple one‐factor model in which the logarithm of the spot price of the commodity is assumed to follow a mean reverting process. The second model takes into account a second stochastic factor, the convenience yield of the commodity, which is assumed to follow a mean reverting process. Finally, the third model also includes stochastic interest rates. The Kalman filter methodology is used to estimate the parameters of the three models for two commercial commodities, copper and oil, and one precious metal, gold. The analysis reveals strong mean reversion in the commercial commodity prices. Using the estimated parameters, we analyze the implications of the models for the term structure of futures prices and volatilities beyond the observed contracts, and for hedging contracts for future delivery. Finally, we analyze the implications of the models for capital budgeting decisions.

The capitalization, amortization, and value-relevance of R&D

1996-02-01

Baruch Lev , Theodore Sougiannis

Falling Forward: Real Options Reasoning and Entrepreneurial Failure

1999-01-01

Rita Gunther McGrath

Although failure in entrepreneurship is pervasive, theory often reflects an equally pervasive antifailure bias. Here, I use real options reasoning to develop a more balanced perspective on the role of … Although failure in entrepreneurship is pervasive, theory often reflects an equally pervasive antifailure bias. Here, I use real options reasoning to develop a more balanced perspective on the role of entrepreneurial failure in wealth creation, which emphasizes managing uncertainty by pursuing high-variance outcomes but investing only if conditions are favorable. This can increase profit potential while containing costs. I also offer propositions that suggest how gains from entrepreneurship may be maximized and losses mitigated.

Option Pricing and Replication with Transactions Costs

1985-12-01

Hayne E. Leland

ABSTRACT Transactions costs invalidate the Black‐Scholes arbitrage argument for option pricing, since continuous revision implies infinite trading. Discrete revision using Black‐Scholes deltas generates errors which are correlated with the market, … ABSTRACT Transactions costs invalidate the Black‐Scholes arbitrage argument for option pricing, since continuous revision implies infinite trading. Discrete revision using Black‐Scholes deltas generates errors which are correlated with the market, and do not approach zero with more frequent revision when transactions costs are included. This paper develops a modified option replicating strategy which depends on the size of transactions costs and the frequency of revision. Hedging errors are uncorrelated with the market and approach zero with more frequent revision. The technique permits calculation of the transactions costs of option replication and provides bounds on option prices.

Investment and Demand Uncertainty

1999-02-01

Luigi Guiso , Giuseppe Parigi

Journal Article Investment and Demand Uncertainty Get access Luigi Guiso, Luigi Guiso Bank of Italy and CEPR Search for other works by this author on: Oxford Academic Google Scholar Giuseppe … Journal Article Investment and Demand Uncertainty Get access Luigi Guiso, Luigi Guiso Bank of Italy and CEPR Search for other works by this author on: Oxford Academic Google Scholar Giuseppe Parigi Giuseppe Parigi Bank of Italy Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 114, Issue 1, February 1999, Pages 185–227, https://doi.org/10.1162/003355399555981 Published: 01 February 1999

Optimal Investment under Uncertainty.

1983-01-01

Andrew B. Abel

This paper examines the effect of output price uncertainty on the investment decision of a risk-neutral competitive firm which faces convex costs of adjustment.' This issue has been analyzed by … This paper examines the effect of output price uncertainty on the investment decision of a risk-neutral competitive firm which faces convex costs of adjustment.' This issue has been analyzed by Richard Hartman (1972) and by Robert Pindyck (1982), but they reached dramatically different results. Hartman showed that with a linearly homogeneous production function, increased output price uncertainty leads the competitive firm to increase its investment. However, Pindyck found increased output price uncertainty leads to increased investment only if the marginal adjustment cost function is convex; but, if the marginal adjustment cost function is concave, then increased uncertainty will reduce the rate of investment. Pindyck argues that his results differ from Hartman's results because of a different stochastic specification of the price of output. In Hartman's discrete-time model, price is random in each period including the current period, whereas in Pindyck's continuous-time model, the current price is known but the future evolution of prices is stochastic. In this paper, I demonstrate that Hartman's results continue to hold using Pindyck's stochastic specification and that Pindyck's analysis applies to a socalled rate of investment, which in general is not optimal. The model developed herein, which is a special case of Pindyck's model, is used because it can be solved explicitly, unlike Pindyck's more general model. Since Pindyck did not derive an expression for the optimal rate of investment, he used a phase diagram to determine the target capital stock. This target capital stock is determined by the intersection of a locus for which the rate of change of the capital stock is zero, and a locus for which the expected change in the rate of investment is zero. A problem with this stochastic phase diagram approach is that in general there is no reason for the firm to be on the locus with zero expected change in investment, even in the long run. Indeed, in the particular model in this paper, optimal behavior is such that the expected proportional rate of change of investment is (in general, a nonzero) constant over time.

Uncertainty and Investment Dynamics

2007-03-23

Nick Bloom , Stephen Bond , John Van Reenen

This paper shows that, with (partial) irreversibility, higher uncertainty reduces the impact effect of demand shocks on investment.Uncertainty increases real option values making firms more cautious when investing or disinvesting.This … This paper shows that, with (partial) irreversibility, higher uncertainty reduces the impact effect of demand shocks on investment.Uncertainty increases real option values making firms more cautious when investing or disinvesting.This is confirmed both numerically for a model with a rich mix of adjustment costs, time-varying uncertainty, and aggregation over investment decisions and time, and also empirically for a panel of manufacturing firms.These cautionary effects of uncertainty are large -going from the lower quartile to the upper quartile of the uncertainty distribution typically halves the first year investment response to demand shocks.This implies the responsiveness of firms to any given policy stimulus may be much lower in periods of high uncertainty, such as after major shocks like OPEC I and 9/11.

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The Valuation of Uncertain Income Streams and the Pricing of Options

1976-01-01

Mark Rubinstein

A simple formula is developed for the valuation of uncertain income streams consistent with rational risk averse investor behavior and equilibrium in financial markets. Applying this formula to the pricing … A simple formula is developed for the valuation of uncertain income streams consistent with rational risk averse investor behavior and equilibrium in financial markets. Applying this formula to the pricing of an option as a function of its associated stock, the Black-Scholes formula is derived even though investors can only trade at discrete points in time.

Policy uncertainty and private investment in developing countries

1991-10-01

Dani Rodrik

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Irreversibility, Uncertainty, and Investment

1990-03-01

Robert S. Pindyck

Most investment expenditures have two important characteristics:First, they are largely irreversible; the firm cannot disinvest, so the expenditures are sunk costs.Second, they can be delayed, allowing the firm to wait … Most investment expenditures have two important characteristics:First, they are largely irreversible; the firm cannot disinvest, so the expenditures are sunk costs.Second, they can be delayed, allowing the firm to wait for new information about prices, costs, and other market conditions before committing resources.An emerging literature has shown that this has important implications for investment decisions, and for the determinants of investment spending.Irreversible investment is especially sensitive to risk, whether with respect to future cash flows, interest rates, or the ultimate cost of the investment.Thus if a policy goal is to stimulate investment, stability and credibility may be more important than tax incentives or interest rates.This paper presents some simple models of irreversible investment, and shows how optimal investment rules and the valuation of projects and firms can be obtained from contingent claims analysis, or alternatively from dynamic programming.It demonstrates some strengths and limitations of the methodology, and shows how the resulting investment rules depend on various parameters that come from the market environment.It also reviews a number of results and insights that have appeared in the literature recently, and discusses possible policy implications.

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Empirical evidence on the relation between stock option compensation and risk taking

2002-06-01

Shivaram Rajgopal , Terry Shevlin

A Theory of Debt Based on the Inalienability of Human Capital

1991-11-01

Oliver Hart , John Moore

Consider an entrepreneur who needs to raise funds from an investor, but cannot commit not to withdraw his human capital from the project. The possibility of a default or quit … Consider an entrepreneur who needs to raise funds from an investor, but cannot commit not to withdraw his human capital from the project. The possibility of a default or quit puts an upper bound on the total future indebtedness from the entrepreneur to the investor at any date. We characterize the optimal repayment path and show how it is affected both by the maturity structure of the project return stream and by the durability and specificity of project assets. Our results are consistent with the conventional wisdom about what determines the maturity structure of long-term debt contracts.

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The Value of Waiting to Invest

1986-11-01

Robert L. McDonald , Donald S. Siegel

Journal Article The Value of Waiting to Invest Get access Robert McDonald, Robert McDonald Northwestern University and National Bureau of Economic Research Search for other works by this author on: … Journal Article The Value of Waiting to Invest Get access Robert McDonald, Robert McDonald Northwestern University and National Bureau of Economic Research Search for other works by this author on: Oxford Academic Google Scholar Daniel Siegel Daniel Siegel Northwestern University and National Bureau of Economic Research Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 101, Issue 4, November 1986, Pages 707–727, https://doi.org/10.2307/1884175 Published: 01 November 1986

Measurement Error and the Relationship between Investment and<i>q</i>

2000-10-01

Timothy B. Erickson , Toni M. Whited

Many recent empirical investment studies have found that the investment of financially constrained firms responds strongly to cash flow. Paralleling these findings is the disappointing performance of the q theory … Many recent empirical investment studies have found that the investment of financially constrained firms responds strongly to cash flow. Paralleling these findings is the disappointing performance of the q theory of investment: even though marginal q should summarize the effects of all factors relevant to the investment decision, cash flow still matters. We examine whether this failure is due to error in measuring marginal q. Using measurement error–consistent generalized method of moments estimators, we find that most of the stylized facts produced by investment‐q cash flow regressions are artifacts of measurement error. Cash flow does not matter, even for financially constrained firms, and despite its simple structure, q theory has good explanatory power once purged of measurement error.

Irreversible Investment, Capacity Choice, and the Value of the Firm

1988-01-01

Robert S. Pindyck

A model of capacity choice and utilization is developed consistent with value maximization when investment is irreversible and future demand is uncertain. Investment requires the full value of a marginal … A model of capacity choice and utilization is developed consistent with value maximization when investment is irreversible and future demand is uncertain. Investment requires the full value of a marginal unit of capacity to be at least as large as its full cost. The former includes the value of the firms option not to utilize the unit, and the latter includes the opportunity cost of exercising the investment option. We show that for moderate amounts of uncertainty, the firm's optimal capacity is much smaller than it would be if investment were reversible, and a large fraction of the firm's value is due to the possibility of future growth. We also characterize the behavior of capacity and capacity utilization, and discuss implications far the measurement of marginal cost and Tobin's q.

Time to build, option value, and investment decisions

1987-03-01

Saman Majd , Robert S. Pindyck

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A Unified Model of Investment Under Uncertainty

1993-03-01

Andrew B. Abel , Janice Eberly

This paper extends the theory of investment under uncertainty to incorporate fixed costs of investment, a wedge between the purchase price and sale price of capital, and potential irreversibility of … This paper extends the theory of investment under uncertainty to incorporate fixed costs of investment, a wedge between the purchase price and sale price of capital, and potential irreversibility of investment.In this extended framework, investment is a non-decreasing function of q, the shadow price of installed capital.There are potentially three investment regimes which depend on the value of q relative to two critical values.For values of q above the upper critical value, investment is positive and is an increasing function of q, as is standard in the theory branch of the adjustment cost literature.For intermediate values of q, between two critical values, investment is zero.Although this regime features prominently in the irreversibility literature, it is largely ignored in the adjustment cost literature.Finally, if q is below the lower critical value, gross investment is negative, a possibility that is ruled out by assumption in the irreversibility of literature.In general however, the shadow price q is not directly observable, so we present two examples relating q to observable variables.

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Assessing Advantage: A Framework for Diagnosing Competitive Superiority

1988-04-01

George S. Day , Robin Wensley

Strategy is about seeking new edges in a market while slowing the erosion of present advantages. Effective strategy moves are grounded in valid and insightful monitoring of the current competitive … Strategy is about seeking new edges in a market while slowing the erosion of present advantages. Effective strategy moves are grounded in valid and insightful monitoring of the current competitive position coupled with evidence that reveals the skills and resources affording the most leverage on future cost and differentiation advantages. Too often the available measures and methods do not satisfy these requirements. Only a limited set of measures may be used, depending on whether the business starts with the market and uses a customer-focused approach or alternatively adopts a competitor-centered perspective. To overcome possible myopia, the evidence of advantage should illuminate the sources of advantage as well as the manifestations of superior customer value and cost superiority, and should be based on a balance of customer and competitor perspectives.

Theory of Rational Option Pricing

1973-01-01

Robert C. Merton

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Lifetime Portfolio Selection By Dynamic Stochastic Programming

1969-08-01

Paul A. Samuelson

Irreversible Investment under Endowment Constraints

2025-06-24

Hanwu Li | Acta Mathematicae Applicatae Sinica English Series

Valuing advertising investment with modular strategies under copula-based dependence

2025-06-23

Lucianna Cananà , Guglielmo D’Amico , Salvatore Vergine | Quality & Quantity

Price-Path Convexity and Short-Horizon Return Predictability

2025-06-20

Huseyin Gulen , Michael Woeppel | Journal of Financial and Quantitative Analysis

EXPRESS: Patent Litigation Risk and Firm Boundaries

2025-06-20

Wu Fan | Production and Operations Management

The increasing prevalence of patent infringement litigation in recent decades has imposed significant costs on firms. This paper empirically examines how this legal risk influences a key operational decision: vertical … The increasing prevalence of patent infringement litigation in recent decades has imposed significant costs on firms. This paper empirically examines how this legal risk influences a key operational decision: vertical integration. Drawing on the real options theory (ROT), we argue that managers reduce the extent of vertical integration to preserve flexibility and make operational adjustments in anticipation of unfavorable outcomes from patent lawsuits. Using a dataset of public firms and a text-based measure of vertical integration, our findings show that firms facing higher patent litigation risk are less vertically integrated. At the same time, these firms maintain broader supplier networks and product market scopes, consistent with a preference for leveraging market mechanisms to reduce the costs of exercising switch and exit options. The negative relationship between litigation risk and vertical integration is particularly pronounced in durable goods sectors and declining industries, where the ability to divest or halt operations is highly valued. Additionally, we find that firms diversify their supplier base and product and technology portfolios after facing patent lawsuits. However, more vertically integrated firms are slower to make these adjustments, suggesting that they encounter greater friction in exercising real options. Overall, our study highlights the significant role that intellectual property disputes play in shaping corporate vertical integration strategies.

Pricing Game Options in Financial Markets with Default: A Doubly Reflected BSDEs Approach

2025-06-20

Badr Elmansouri , Mohamed El Otmani | International Journal of Theoretical and Applied Finance

Methodology For Evaluating Investment Projects Under Uncertainty

2025-06-18

A. R. Simonyan | The American Journal of Management and Economics Innovations

This paper examines contemporary approaches to evaluating investment projects under conditions of uncertainty. It centers on the mathematical formalization of discounted cash-flow and annuity methods, and on their integration with … This paper examines contemporary approaches to evaluating investment projects under conditions of uncertainty. It centers on the mathematical formalization of discounted cash-flow and annuity methods, and on their integration with sensitivity analysis and stress-testing frameworks. The study justifies the need for an integrated model that accounts for asymmetric project perceptions as well as a range of additional risk factors influencing financial outcomes. Practical feasibility is demonstrated through the use of programmable spreadsheets, enabling flexible parameterization and rapid updating of inputs. The results not only facilitate an objective assessment of a project’s investment appeal but also yield concrete risk-management recommendations, thereby enhancing project resilience in a dynamic economic environment. This work will interest researchers, graduate students and practitioners in finance and investment analysis who seek to fuse theoretically sound models with empirical evaluation to derive robust strategic decisions under market uncertainty. Moreover, the paper offers value to academics and executives engaged in interdisciplinary research aimed at critically refining and optimizing investment appraisal techniques through advanced econometric and mathematical methods.

Dynamic Programming for Valuing Options Embedded in Corporate Bonds

2025-06-17

Malek Ben-Abdellatif , Hatem Ben‐Ameur , Rim Chérif +1 more | The Journal of Derivatives

Diverging Paths to Profitability in the Indian Cement Sector through Asset Efficiency and Capital Discipline

2025-06-17

Ashish Premjibhai Chirodiya | Journal of Social Commerce

Lagos, a Nigerian state, is one of the world's most populous cities, and its transit infrastructure is under immense pressure. The state's public transportation infrastructure is grossly inadequate in suburban … Lagos, a Nigerian state, is one of the world's most populous cities, and its transit infrastructure is under immense pressure. The state's public transportation infrastructure is grossly inadequate in suburban areas, causing traffic congestion since many residents lack access to affordable and reliable transportation. Another factor contributing to Lagos' transportation challenges is the city's socioeconomic disparities. In light of this, this study examines the transportation mobility and social equity policies in metropolitan Lagos. The study employed the interpretivist philosophy also known as qualitative or phenomenological research approach in data collection. Primary data were generated mainly through key informant interviews, while secondary data were gathered from the internet, journals, newspaper editorials, transportation policy documents, and other government publications. Key informant interviews were conducted with officers from the Lagos State Ministry of Transportation. The acquired data was analysed using a content analytic approach. Findings of the study revealed that population growth in the state's sub-urban and rural areas has put pressure on the city's infrastructure, especially its transportation system, necessitating a rethinking of transportation mobility. The study concluded that the government must invest heavily in public transport services in suburban and rural areas through public-private partnerships (PPPs) in order to improve the quality and expand the state's public transport network. The study further asserted that the state government's system of discounted fares will make transportation more affordable and accessible to low-income residents.

Projects with uncertain requirements and deadlines

2025-06-15

Philipp Külpmann | Economic Theory

Abstract I analyze a dynamic moral hazard problem in teams with imperfect monitoring in continuous time. In the model, players work together to achieve a breakthrough in a project while … Abstract I analyze a dynamic moral hazard problem in teams with imperfect monitoring in continuous time. In the model, players work together to achieve a breakthrough in a project while facing a deadline. The target effort needed to achieve a breakthrough is unknown, but the players have a common prior about its distribution. I characterize the equilibrium and the effort path that maximizes the team’s welfare for general distributions of this target effort and show that three effects are at work: free-riding (i.e., working less), last-minute rush (i.e., working later), and a past-effort effect (i.e., working more if others worked more in the past). This past-effort effect increases or decreases the amount of work players put into the project, depending on the type of project faced.

A Real Options Model for CCUS Investment: CO2 Hydrogenation to Methanol in a Chinese Integrated Refining–Chemical Plant

2025-06-12

Ruirui Fang , Xianxiang Gan , Yubing Bai +1 more | Energies

The scaling up of carbon capture, utilization, and storage (CCUS) deployment is constrained by multiple factors, including technological immaturity, high capital expenditures, and extended investment return periods. The existing research … The scaling up of carbon capture, utilization, and storage (CCUS) deployment is constrained by multiple factors, including technological immaturity, high capital expenditures, and extended investment return periods. The existing research on CCUS investment decisions predominantly centers on coal-fired power plants, with the utilization pathways placing a primary emphasis on storage or enhanced oil recovery (EOR). There is limited research available regarding the chemical utilization of carbon dioxide (CO2). This study develops an options-based analytical model, employing geometric Brownian motion to characterize carbon and oil price uncertainties while incorporating the learning curve effect in carbon capture infrastructure costs. Additionally, revenues from chemical utilization and EOR are integrated into the return model. A case study is conducted on a process producing 100,000 tons of methanol annually via CO2 hydrogenation. Based on numerical simulations, we determine the optimal investment conditions for the “CO2-to-methanol + EOR” collaborative scheme. Parameter sensitivity analyses further evaluate how key variables—carbon pricing, oil market dynamics, targeted subsidies, and the cost of renewable electricity—influence investment timing and feasibility. The results reveal that the following: (1) Carbon pricing plays a pivotal role in influencing investment decisions related to CCUS. A stable and sufficiently high carbon price improves the economic feasibility of CCUS projects. When the initial carbon price reaches 125 CNY/t or higher, refining–chemical integrated plants are incentivized to make immediate investments. (2) Increases in oil prices also encourage CCUS investment decisions by refining–chemical integrated plants, but the effect is weaker than that of carbon prices. The model reveals that when oil prices exceed USD 134 per barrel, the investment trigger is activated, leading to earlier project implementation. (3) EOR subsidy and the initial equipment investment subsidy can promote investment and bring forward the expected exercise time of the option. Immediate investment conditions will be triggered when EOR subsidy reaches CNY 75 per barrel or more, or the subsidy coefficient reaches 0.2 or higher. (4) The levelized cost of electricity (LCOE) from photovoltaic sources is identified as a key determinant of hydrogen production economics. A sustained decline in LCOE—from CNY 0.30/kWh to 0.22/kWh, and further to 0.12/kWh or below—significantly advances the optimal investment window. When LCOE reaches CNY 0.12/kWh, the project achieves economic viability, enabling investment potentially as early as 2025. This study provides guidance and reference cases for CCUS investment decisions integrating EOR and chemical utilization in China’s refining–chemical integrated plants.

Valuation Discrepancy of Coffee Chains in the US and China: A Capital Market Perspective

2025-06-09

Wei Zhang | Advances in Economics Management and Political Sciences

This paper investigates the valuation discrepancy between major coffee chains in the United States and China, focusing on Starbucks and Luckin Coffee. Although both firms demonstrate strong revenue growth, comparable … This paper investigates the valuation discrepancy between major coffee chains in the United States and China, focusing on Starbucks and Luckin Coffee. Although both firms demonstrate strong revenue growth, comparable business models, and digital innovation, their valuation multiples differ markedly in global capital markets. Starbucks commands significantly higher P/E and EV/EBITDA multiples compared to Luckin. This study applies a trading comparables framework to estimate Luckins implied value and explore the gap relative to market valuation. Furthermore, the research integrates structural variables including investor composition, regulatory transparency, listing venue, and ESG performance to explain the valuation divergence. Results suggest that such institutional and market factorsnot just firm-specific fundamentalsplay a pivotal role in determining cross-border valuation outcomes. In doing so, the study highlights the limitations of traditional valuation models when applied across regulatory environments and offers recommendations for refining comparative analysis in global investment contexts. The findings contribute practical insights for investment banking professionals involved in IPO pricing, equity research, and international M&A advisory, particularly in the context of emerging-market issuers.

Valuation and optimal operation of power investment projects with and without volume constraints under one-factor model

2025-06-03

Lingjie Shao , Junle Wu , Jinghan Ma +2 more | Energy

Green technology innovation with environmental constraints

2025-06-03

Pengfei Luo , Yingxian Tan , Jinqiang Yang +1 more | Quantitative Finance

Commodity futures option valuation – An ensemble model

2025-06-01

Yi Cao , Jia Zhai , Conghua Wen +2 more | International Review of Financial Analysis

Subsidizing uncertain investments: The role of production technology and imprecise learning

2025-06-01

Christian Riis Flor , Kevin Berg Grell | Journal of Corporate Finance

Ants rather than molecules: the impact of herding on investment under uncertainty

2025-05-29

Elmar Lukas | European Journal of Finance

Sophisticated Capital Budgeting Decisions for Financial Performance and Risk Management—A Tale of Two Business Entities

2025-05-29

Asep Darmansyah , Qaisar Ali , Shazia Parveen | Journal of risk and financial management

Capital budgeting, particularly sophisticated decisions, is key to the financial performance and risk management of firms, yet academic studies have documented their relationship inconsistently. This study employs the fundamentals of … Capital budgeting, particularly sophisticated decisions, is key to the financial performance and risk management of firms, yet academic studies have documented their relationship inconsistently. This study employs the fundamentals of resource-based view (RBV) and agency theories to investigate the impact of sophisticated capital budgeting decisions on financial performance and risk management of the firms of two different sizes, classified as small and medium enterprises (SMEs) and multinational corporations (MNCs). The empirical data of 590 Indonesian firms from between 2014 and 2023 were obtained and analyzed through the Generalized Method of Moments (GMM) technique. The results show that the usage of sophisticated capital budgeting decisions in investment appraisals of classified firms significantly improves their financial performance. Further analyses confirm that although sophisticated capital budgeting decisions are robust in resolving solvency issues, they appear less effective in reducing liquidity risks. The findings also elucidate that sampled firms may realize the financial benefits of sophisticated risk management. The mediation results highlighted that risk management has a significant and positive effect on the relationship between sophisticated capital budgeting decisions and financial performance. The present study contributes to corporate finance by validating the relevance of SCBDs in strategic financial planning and stable investments in firms of different sizes.

Equity Method of Investment Evaluation

2025-05-28

Nadezhda Kvatashidze | Economics and Business

The Impact of Two-Sided Contracts for Difference on Debt Sizing for Offshore Wind Farms

2025-05-24

Mak Đukan , Dogan Keles , Lena Kitzing

Two-sided Contracts for Difference (CfD) are a remuneration mechanism that stabilizes revenues and leads to better financing conditions for offshore wind farms. Despite the EU Commission’s efforts to make two-sided … Two-sided Contracts for Difference (CfD) are a remuneration mechanism that stabilizes revenues and leads to better financing conditions for offshore wind farms. Despite the EU Commission’s efforts to make two-sided CfDs a mandatory remuneration scheme, many leading offshore wind markets in Europe still apply one-sided CfDs, which, combined with competitive auctions, often result in zero bids and merchant risk exposure. We contribute to the debate on the two-sided CfD effect on financing by quantifying their impact on debt size. Our approach combines a stochastic power price and wind-power feed-in model with cash flow liquidity management in a project financing setting. We show that offshore wind farms with two-sided CfDs experience less financial distress, increasing debt size between 15 and 27 percentage points compared to a project with merchant revenues. The leverage increase could save consumers between 12 and 19 EUR/MWh in electricity generation costs. This emphasizes the importance of continuing revenue stabilization measures to ensure a cost-effective mobilization of investments for financing Europe’s energy transition. JEL Classification: G32, G38, Q48, Q42

The business case for abatement: the key levers for improving financial return of marginal abatement projects

2025-05-22

Janet Dwyer , Krista McGowan

Emissions abatement projects often do not progress because they cannot meet the investment hurdles applied to projects. So what conditions are needed to create a compelling business case for a … Emissions abatement projects often do not progress because they cannot meet the investment hurdles applied to projects. So what conditions are needed to create a compelling business case for a marginal abatement project? This paper describes the key levers for improving the business case, such as the global warming potential of methane, shadow carbon price, sales gas value, common user infrastructure and payback period. Drawing on examples from the natural gas production sector, it describes abatement projects that tend to be marginally negative in terms of return on investment and what conditions are needed to change that into a positive return. In many cases, small changes are enough to switch the economics into a positive outcome.

Zero-Sum Mean-Field Dynkin Games: Characterization and Convergence

2025-05-22

Boualem Djehiche , Roxana Dumitrescu

We introduce a zero-sum game problem of mean-field type as an extension of the classical zero-sum Dynkin game problem to the case where the payoff processes might depend on the … We introduce a zero-sum game problem of mean-field type as an extension of the classical zero-sum Dynkin game problem to the case where the payoff processes might depend on the value of the game and its probability law. We establish sufficient conditions under which such a game admits a value and a saddle point. Furthermore, we provide a characterization of the value of the game in terms of a specific class of doubly reflected backward stochastic differential equations of mean-field type, for which we derive an existence and uniqueness result. We then introduce a corresponding system of weakly interacting zero-sum Dynkin games and show its well-posedness. Finally, we provide a propagation of chaos result for the value of the zero-sum mean-field Dynkin game.

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Vanilla options as controls for estimating the conditional expectation of a European derivative payoff

2025-05-21

Eddie W. K. Chiu

Abstract One way to estimate conditional expectations based on a simulation sample is to fit a parametric model to the data set and compute the conditional expectations based on the … Abstract One way to estimate conditional expectations based on a simulation sample is to fit a parametric model to the data set and compute the conditional expectations based on the fitted model. This method may be enhanced by the control variates method. The choice of controls is critical to the effectiveness of the method. We propose the use of vanilla options as controls for estimating conditional expectations of derivative payoffs, and we provide a theoretical analysis on the uniform approximation property of vanilla options for estimating conditional expectations. Our theory suggests that vanilla options can reduce the variance of a target payoff to an arbitrarily small level subject to some assumptions. We provide examples to illustrate our proposed approach and also discuss several considerations when applying vanilla options as controls for estimating conditional expectations.

Multi-capital accounting: why and what’s next? A powerful driving force to transform business models toward regeneration

2025-05-14

Christophe Sempels

Purpose This paper aims to explore the potential for repositioning multi-capital accounting (MCA) from a diagnostic tool for assessing the (un)sustainability of existing operations to a strategic asset in the … Purpose This paper aims to explore the potential for repositioning multi-capital accounting (MCA) from a diagnostic tool for assessing the (un)sustainability of existing operations to a strategic asset in the strategic innovation process to help regenerative business model innovation emerge and gain traction. Design/methodology/approach This paper draws on existing literature and on the practical experience of the author in supporting business model innovation for strong sustainability to explore opportunities for MCA to facilitate the shift from volume-based to regenerative approaches. Findings The analysis highlights the importance of bringing a systemic perspective to performance and a new hierarchy of norms into the strategic innovation process. It shows how MCA could effectively capture the unique performance dynamics and complexities of regenerative business models as a holistic management information system and serve as a source of institutional support. To achieve this repositioning of MCA as a proactive resource in the conception, design, evaluation and management of innovative or inherently regenerative business models, it is imperative to forge connections between MCA researchers and those specializing in business model innovation for sustainability. Practical implications By aligning MCA models with the strategy innovation process, strategic decision-makers can benefit from better data, insight and confidence to identify opportunities for innovative business models for regeneration. They also develop the relevant analytical and information infrastructure to improve the ability to properly operate these innovative business models. Social implications Failure to accelerate business model innovation will further delay progress on achieving the sustainable development goals with potentially devastating consequences for people and the planet. Originality/value The discussion calls for building a bridge between MCA and business model innovation for regeneration, which could be mutually beneficial. It encourages these research and practice communities to collaborate in better integrating MCA with the strategic innovation process. Ultimately, this would transform MCA from a reporting tool based on past performance into a forward-looking instrument that assists a company’ decision-makers in designing their strategy and addressing key strategic asset for a broader range of stakeholders.

Portfolio optimization of diversified energy transition investments with multiple risks

2025-05-13

Qing Su , Peng Zhou , Hao Ding

The relationship (expected return/risk) in financial investment

2025-05-13

Fatima Zohra Benyamina , Ahmed Boudissa , Khayra Benyamina +2 more

In this work we used to discuss the financial investment risk and the relation between it and the required return , we used to show how can the Capital Asset … In this work we used to discuss the financial investment risk and the relation between it and the required return , we used to show how can the Capital Asset Pricing Model (CAPM) be useful for evaluating risk and setting an equation that describe how does expected return relate to risk attached to the chosen investment . The investor in building his portfolio will ask for a return that cover the risk he is taking through it , by using CAPM determination , we saw how does return change according to the risk level . Evaluating and measuring risk, by quantitative methods can offer an answer to the investor who asks himself: how much I have to gain to cover my risk. And it can also help him to evaluate his investment manager if theirs is one.

Valuation complexities in the energy transition: A comparative study of traditional vs. Green Energy Firms in M&A Transactions

2025-05-10

Rikuto Shiraishi , Munashe Naphtali Mupa

Mergers and acquisitions (M&A) valuation has undergone a dramatic shift in the global energy transition, particularly as the industry transforms from a conventional hydrocarbon-based epoch to clean or green energy … Mergers and acquisitions (M&A) valuation has undergone a dramatic shift in the global energy transition, particularly as the industry transforms from a conventional hydrocarbon-based epoch to clean or green energy paradigms. Compared the complexities of valuations in M&A transactions as they relate to conventional vs. green energy firms. One of the shortcomings of traditional valuation methodologies such as Discounted Cash Flow (DCF) and market multiples is their inability to fully value green energy companies with heavy emphasis on intangible assets, policy sensitivity, and uncertain future cash flow. The study reveals the advantages of scenario-based DCF, real options analysis, and ESG-adjusted metrics for valuing renewable energy. The research also further investigates the impact of environmental, social, and governance (ESG) factors, as well as intangible assets like patents and regulatory licenses, on firm valuations and investment choices. Utilizing qualitative case studies and thematic analysis, the research emphasizes progression in M&A in both sectors, demonstrating a significant dichotomy between resource control in traditional firms versus innovation acquisition in green firms. This suggests that analysts and investors need better tools to understand the evolving energy market, which can be achieved through hybrid models based on both insight from the economics of investing in the market as well as in the broader environment of regulation and sustainability.

Multi-stage research and development project appraisal under uncertain composite real options

2025-05-08

Ting Jin , Zaiwu Gong , Bailin Zhang +2 more

Enhancing Real Estate Project Feasibility Through Real Option Analysis

2025-05-08

V kaviya , J Anisha

Real estate development projects are often influenced by market uncertainty, long timelines, and changing economic conditions. Traditional evaluation methods, such as Discounted Cash Flow (DCF) analysis, assume fixed future cash … Real estate development projects are often influenced by market uncertainty, long timelines, and changing economic conditions. Traditional evaluation methods, such as Discounted Cash Flow (DCF) analysis, assume fixed future cash flows and may not fully capture the value of strategic flexibility. In this study, a residential real estate project was first evaluated using DCF, which showed that immediate investment was not financially favourable. To better understand the potential for flexibility, a Real Option Analysis (ROA) was applied using a binomial tree framework, focusing on the option to defer investment by one year. This approach helps to assess whether waiting can improve project outcomes under uncertain conditions. Additionally, a limited sensitivity analysis was conducted to observe how factors, such as rental income growth and construction cost changes, could affect the results. Overall, the study highlights how applying ROA offers a more flexible and responsive way to evaluate real estate investments compared to static models

Strategic factors and the use of risk analysis techniques in strategic investment decisions

2025-05-07

Jari Huikku , Jouko Karjalainen , Tomi Seppälä

The Quality of the Real Estate Valuation Process

2025-05-04

Piotr Kuraś

Abstract For each market participant, knowing the value of the assets they manage is very important. Real estate is an essential group of such assets. Knowing their value determines the … Abstract For each market participant, knowing the value of the assets they manage is very important. Real estate is an essential group of such assets. Knowing their value determines the economic efficiency of decisions made on the real estate market. Real estate valuation is complex because the market is not transparent and is characterised by low information efficiency. The study hypothesised that it is possible to model risk in the real estate valuation process. The aim of the article is to identify and escribe the areas and sources of risk occurring in Polish valuation practice. A mixed research approach was used: literature research, questionnaire research and qualitative inference methods.

Economics Tools: Techno-Economic Analysis, Life Cycle Costing, and Valuation

2025-05-01

Strategic capacity investment with common ownership

2025-05-01

Domenico De Giovanni , Richard Ruble , Dimitrios Zormpas

The neoclassical theory of aggregate investment and its criticisms

2021-01-01

Daniele Girardi

This paper surveys the neoclassical theory of aggregate investment and its criticisms. We identify four main strands in neoclassical investment theory: (i) the traditional Wicksellian model; (ii) the Fisherian ‘array-of-opportunities’ … This paper surveys the neoclassical theory of aggregate investment and its criticisms. We identify four main strands in neoclassical investment theory: (i) the traditional Wicksellian model; (ii) the Fisherian ‘array-of-opportunities’ approach; (iii) the Jorgensonian model; (iv) the now prevailing adjustment cost models. We summarize each approach, discuss the main conceptual issues, and highlight similarities and differences between them. We also provide a systematic summary and discussion of the main criticisms that have been leveled at each of these models and highlight some unresolved theoretical issues.