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Published Articles for Year 2010
Multinational Finance Journal, 2010, vol. 14, no. 3/4, pp. 255-289
Jøril Mæland , Norwegian School of Economics and Business Administration, Norway    Corresponding Author

Abstract:
The owner of a real option does not have the necessary expertise to manage the investment project and needs to contract with an expert in order to exercise the real option. The potential managers (the experts) have private information about their respective cost of investing in the project. The project owner organizes an auction in which the experts participate. The winner of the contract is the expert who can exercise the investment project at the lowest cost. The optimal contract is incentive compatible, i.e., it induces the winner to follow the investment strategy preferred by the project owner. It is shown that private information increases the project owner's cost of exercising the option, which may lead to under-investment. The inefficiency due to under-investment decreases in the number of experts participating in the auction.

Keywords : real options; investment strategy; private information; auction
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Multinational Finance Journal, 2010, vol. 14, no. 3/4, pp. 291-317
Ephraim Clark , Middlesex University, U.K.    Corresponding Author
Patrick Rousseau , Université Aix-Marseille, France
Magid Gadad , The Academy of Graduate Studies, Tripoli

Abstract:
This paper looks at divestitures by 144 UK firms listed on the London Stock Exchange from 1985 to 1991 and investigates whether and how accurately investors price the firm’s option to abandon assets in exchange for their exit value. Theory prices this real option as an American style put and the model we test includes the major features of the abandonment option literature: stochastic firm value, stochastic exit value, intermediate cash flows and uncertain project life. It also includes random events that can short circuit the optimal timing of the divestiture and trigger abandonment prematurely. The empirical implications are that investors do price the abandonment option but that they price it imperfectly because the exit price is private information. There is evidence that the effects of the timing factor are accurately priced and that the probability of forced premature abandonment figures in the option pricing.

Keywords : real options; abandonment; divestiture; premature abandonment; abnormal returns
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Multinational Finance Journal, 2010, vol. 14, no. 3/4, pp. 219-254
Marco Antonio Guimarães Dias , PUC-Rio, Brazil    Corresponding Author
José Paulo Teixeira , PUC-Rio, Brazil

Abstract:
This paper discusses a selected literature on continuous-time option games models, providing new insights and extensions. The paper analyzes both symmetrical and asymmetrical duopoly under uncertainty, including issues like preemption, non-binding collusion, perfect-Nash equilibriums, first-mover advantage, mixed strategies, probability of mistake with simultaneous exercise, competitive advantage effect, etc. In the first model, the demand follows a stochastic process, whereas in the second model the exchange rate follows a stochastic process. This paper presents two equivalent ways to calculate the leader and follower values and thresholds, the differential and the integral methods. The paper extends the Joaquin and Buttler’s model by considering mixed strategies in asymmetric duopoly and other extensions.

Keywords : option games; real options; game theory; duopoly under uncertainty; preemption
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Multinational Finance Journal, 2010, vol. 14, no. 1/2, pp. 1-27
Thomas E. Copeland , CRA International, MIT    Corresponding Author

Abstract:
This article attempts to answer some of the most common questions about how to apply the theory of real options to practice. Its primary focus is on how to start with irregular expected cash flows of the underlying risky asset that do not follow any regular stochastic process and end up with a legitimate real options analysis. It is organized as follows. Section I is a simple numerical example. Section II discusses the necessary theory -- three key assumptions. Section III discusses how to estimate volatility. Section IV goes on to describe six short case examples where the solution process worked well. The paper discusses why traditional NPV methodology forces false mutually exclusive alternatives and how real options solves the problem, and illustrates how modularity of project construction can be more valuable than significant economies of scale.

Keywords : n/a
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Multinational Finance Journal, 2010, vol. 14, no. 1/2, pp. 29-71
Tom Arnold , University of Richmond, USA    Corresponding Author
Richard Shockley , Indiana University, USA

Abstract:
This paper provides a non-technical presentation of the theoretical foundations of corporate financial decision making and the net present value (NPV) rule. Our objective is to show that the concepts of value and value creation arise from a single, unified framework that is firmly rooted in neoclassical microeconomic theory. This, in turn, allow us to demonstrate that the corporate valuation approach generically known as real options analysis is perfectly justifiable – without further qualification – in any situation when investors want managers to maximize NPV.

Keywords : NPV; real options analysis; arbitrage; fundamental theorem of asset pricing
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Multinational Finance Journal, 2010, vol. 14, no. 1/2, pp. 73-123
Gordon Sick , University of Calgary, Canada    Corresponding Author
Andrea Gamba , University of Verona, Italy

Abstract:
This paper provides an introduction to real options, as well as highlighting some important issues that are often neglected by real options analysts. While many books and surveys have been written on real options, there are some ubiquitous concepts that are not well-understood by many authors and practitioners. The objective of this paper is to redress this shortfall. The paper discusses organizational issues that impede adoption of real options strategies. It discusses modeling and analytic techniques for real options.

Keywords : Real Options; Capital Budgeting; Numerical Methods
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Multinational Finance Journal, 2010, vol. 14, no. 1/2, pp. 125-151
Han T.J. Smit , Erasmus University Rotterdam, Netherlands    Corresponding Author
Lenos Trigeorgis , University of Cyprus, Cyprus

Abstract:
We present a framework for value-based strategic planning combining concepts and tools from strategy and finance. Our ‘Expanded NPV’ framework reconciles flexibility and strategic commitment, viewing strategic planning as managing a portfolio of real options with competitive interactions. The flexibility and strategic value of a business strategy are interwoven with that strategy’s design. We synthesize real options and game theory to evaluate projects or acquisitions. We connect strategic planning and the underlying sources of value creation with the market value of the firm and its three main value components: expected cash flows or assets in place (NPV), flexibility (growth options), and strategic value (moves and games). We develop implications depending on simple or compound growth options, the type and competitive impact of the investment, and relative market power.

Keywords : strategic planning; real options; game theory; option games; competition
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Multinational Finance Journal, 2010, vol. 14, no. 3/4, pp. 153-188
Blake Johnson , Stanford University, USA    Corresponding Author

Abstract:
A company’s operating capabilities, performance and risk are determined by its supply chain, the complex set of activities spread across internal functions and external partners that together enable it to deliver its products. Supply chains have traditionally been coordinated with deterministic plans together with inventory buffers added to accommodate uncertainty. More recently, substantial investments have been made in supply chain information sharing, collaboration, and responsiveness initiatives to enable supply chains to react more rapidly to the outcomes of key sources of uncertainty as they become known. To date, however, capabilities that enable supply chain uncertainty to be identified and evaluated before the fact, and its performance impact proactively quantified and managed, have been absent, and as a result offer the potential for significant further improvements in performance and control.

Keywords : Supply chain; Performance management; Risk management; Flexibility
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Multinational Finance Journal, 2010, vol. 14, no. 3/4, pp. 189-217
Bart M. Lambrecht , Lancaster University Management School, UK    Corresponding Author
Grzegorz Pawlina , Lancaster University Management School, UK

Abstract:
This paper considers real options within a continuous-time corporate finance context. We analyze whether these real options are exercised effciently, and what the underlying sources of inefficiency are. In particular we consider the role of incomplete information, competition, search costs and financing constraints on investment decisions. We also analyze the stockholder-bondholder and the manager-stockholder agency problems, and their effect on a firm's investment and closure policies.

Keywords : real options, product market competition; costly search; financing constraints; agency problem
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