Real options in divestment alternatives

Damaraju, Naga Lakshmi; Barney, Jay B.; Makhija, Anil K.

doi:10.1002/smj.2243

Cited by 65 publications

(9 citation statements)

References 72 publications

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“…Gulen and Ion (2016) suggest that if investment projects are irreversible, uncertainty can lead firms to wait until the uncertainty is resolved before acting. Damaraju et al (2015) suggest that delaying a divestiture may be a rational reaction to uncertainty in the business environment. They note that spin-offs and carve-outs are often the first stage of a complete divestment and thus may exhibit real option characteristics.…”

Section: Epu and The Type Of Divestiturementioning

confidence: 99%

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Economic policy uncertainty and corporate divestitures

Frye,

Pham,

Whyte

2023

Business Fin & Account

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We examine the impact of economic policy uncertainty (EPU) on the propensity of firms to engage in divestitures. We find that EPU is positively related to the likelihood of divestitures in general and cashflow‐generating divestitures in particular. Consistent with the desire for cash being a driving force behind divestitures, we find that underperforming firms are more likely to engage in cashflow‐increasing divestitures. Firms that do not pay dividends and are relatively more reliant on government funding are also more likely to pursue sell‐offs and carve‐outs when economic uncertainty is elevated. We find no evidence that firms prefer staged divestitures (spin‐offs and carve‐outs) over non‐staged (sell‐offs) when EPU is high. Instead, EPU is positively related to the likelihood of non‐staged divestitures suggesting that firms do not wait until uncertainty is resolved to pursue deals with a high degree of irreversibility. Our findings point to EPU as a motivator for poor‐performing firms to shore up cash during times of EPU.

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Section: Epu and The Type Of Divestiturementioning

confidence: 99%

“…Second, we group restructuring into staged (spin-offs and carve-outs) and non-staged divestitures (sell-offs). Damaraju et al (2015) argue that sell-offs are difficult to reverse. If investment projects are irreversible, firms have the option to wait until the uncertainty is resolved before investing (Gulen & Ion, 2016).…”

Section: Introductionmentioning

confidence: 99%

Economic policy uncertainty and corporate divestitures

Frye,

Pham,

Whyte

2023

Business Fin & Account

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“…Another reason was the fact that the project with land purchase showed greater volatility. According to the authors of [102], the abandonment option has a more considerable value the greater the uncertainty about the project.…”

Section: Stochastic Modelmentioning

confidence: 99%

Investments in Pinus elliottii Engelm. Plantations: Real Options Analysis in Discrete Time

Martins

Silva

Munis

et al. 2022

Forests

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Background: The commonly used methods for the financial evaluation of plantation forest investment projects do not incorporate uncertainties and ignore the value related to flexibility. The real options analysis makes it possible to capture these values in investment projects, increasing their value and return. Despite this, studies involving real options in forest investment projects are scarce, specifically those related to Pinus spp. Therefore, this study aimed to: (a) analyze whether the real options analysis adds value to investment projects of Pinus elliottii Engelm. plantations; and (b) make the real options analysis more accessible to forest managers and potentially increase its use in the investment projects of Pinus spp. plantations. Methods: We evaluated two investment projects in P. elliottii plantations in southern Brazil, which differed in the way of obtaining the land for planting: with lease or purchase of land on a planning horizon of 21 years. In the real options analysis, we used deferral, expansion, and abandonment. Results: Individually, the deferral, expansion, and abandonment options add value to investment projects in Pinus elliottii plantations. The option to expand the forested area is one that adds the most value to the investment project with land lease. In the investment project with land purchase, it is abandonment. Conclusions: Investment projects in Pinus elliotti plantations that contemplate the land purchase analyzed through the real options analysis present higher financial returns than those that consider land lease, inverting the result provided by the traditional analysis.

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“…Besides, several methodologies propose to estimate it more effectively, although there is little consensus about the approach, which ends up by generating more controversies (Choi et al, 2016;Mun, 2016). For example, Damaraju et al (2015) understand that volatility is not constant, as determined by the Black-Scholes model, but it varies depending on the price of the underlying asset. However, Pless et al (2016) clarify that it is not a trivial matter to associate the volatility of an investment project with the variation in price of the underlying asset, since it is not traded in the financial market.…”

Section: Real Options Theorymentioning

confidence: 99%

Comparative evaluation of investment analysis methods: an application in renewable energy auctions between 2011 e 2015

Caldas

Júnior

2021

ReA UFSM

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Purpose - This work aims to analyze the assertiveness of net present value (NPV) and real options theory (ROT), at the moment of decision making for investments in renewable energy projects, considering the 244 winning projects in the auctions of reserve energy that occurred between 2011 and 2015.Design/methodology/approach –This is a quantitative study that used real data from 150 wind power and 94 photovoltaic projects available on ANEEL´s website. For data analysis, the confusion matrix, the area under the ROC Curve and the Kappa Index were used.Findings – It was concluded that NPV is more effective for recommendations to invest in projects with chances to be successful, while ROT is more accurate in suggesting against investing in projects with propensity for failure. It was also found that the degree of agreement between the two techniques is substantial and determined by the level of volatility of real options.Research limitations/implications – The limitations of this study refer to the difficulties of identifying the reasons that motivated failures in the projects.Originality/value – Theoretically, this work contributes to identify the characteristics that effectively differentiate ROT from NPV at the time of decision making. Empirically, this work contributes to doing an ex-post analysis of the projects.

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Real options in divestment alternatives

Cited by 65 publications

References 72 publications

Economic policy uncertainty and corporate divestitures

Economic policy uncertainty and corporate divestitures

Investments in Pinus elliottii Engelm. Plantations: Real Options Analysis in Discrete Time

Comparative evaluation of investment analysis methods: an application in renewable energy auctions between 2011 e 2015

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