In recent years, practitioners and academics have become increasingly concerned that traditional discounted cash flow valuation models, such as the net present value model, are not capable of adequately capturing the value of managerial flexibilities to delay, grow, scale down, or abandon projects. The effect of ignorance of such managerial flexibilities can be potentially substantial, with the possibility of producing biased decisions. Real options analysis provides the insights that business investment projects can be conceptually compared to financial options and is therefore able to seize the value of managerial flexibilities. <br /> The purpose of this thesis is to develop a theoretical model based on option pricing theory to evaluate the managerial flexibilities arising in a variety of mergers and acquisitions, which vary in payment forms. The thesis shows how transactions can be structured as a real exchange options, given the share price of each participating firm is subject to a specified degree of uncertainty. The takeover decisions of bidder or target, i.e., the takeover threshold to bid or to accept the bid, is obtained through the analysis. In addition, the thesis provides valuable theoretical insights into the following aspects: <br /> <ul> <li>The impact of the form of payment on the decision making process for each participant and corresponding merger terms</li> <li>The payment form that minimizes the threshold to trigger a transaction</li> <li>The allocating rule of mergers and acquisitions synergy when payment form threshold is employed </li> </ul> <br /> In the latter part of thesis, an empirical study is conducted on mergers and acquisitions completed by US public bidders between January 1985 and April 2004 excluding all financial institutions deals. Strong support is found from the data that some of the target firm characteristics such as expected growth rate and volatility are significant in explaining the payment form choices.

Large complex construction projects such as building an interstate highway, a dam, a chemical plant, an off-shore oil rig and a waste-to-energy plant often include unpredictable geological conditions, labor supplies, material deliveries, and weather that cause uncertainty. Effective and efficient acquisition and construction require the proactive management of these and other uncertainties to meet performance, schedule, and cost targets. Flexibility in the form of real options can be an effective tool for managing uncertainty and thereby adding value to construction projects. But flexibility can be expensive to obtain, maintain, and implement. Real options theory suggests a general approach and has developed precise valuation models. But these models of simplified real options (compared to managerial practice) have failed to significantly improve practice, partially because of a lack of knowledge of real options use by practicing managers. In contrast, the majority of managerial real options applications are identified, designed, valued, and implemented tacitly by construction managers. Understanding current practice and its similarities and differences with theory is critical for developing operational real options theories that can improve construction practice. Few descriptions of managerial real options practice exist as a basis for improvement. To address this need the current research has experiment subjects manage a simple but uncertain installation project with managerial flexibility. Subjects repeatedly value an option to avoid a slow and expensive system integration failure. Real options theory is used to explain their behaviors by customizing the model of uncertainty to reflect themanagement context. To further analyze managerial real options practice, a system dynamics simulation model of the experimental installation project is developed. Policies for using flexibility to manage uncertainty that are applied by subjects are modeled and performances are simulated across a range of uncertain conditions to evaluate and compare policy effectiveness. All 21 subjects that participated in the research perceived flexibility as an effective tool in managing uncertain projects. But they are not aware of the factors that impact flexibility value. They correctly identified the relationship of some factors with flexibility value but not all of them and not the magnitude of impaction. Further research and development needs for expanding real options theory into the operational management of construction are discussed based on experiment and simulation results.

Thesis (Ph.D.)--Kent State University, 2008. / Title from PDF t.p. (viewed March 3, 2010). Advisor: Mark Holder. Keywords: diversification; diversification discount; value measurement; real options. Includes bibliographical references (p. 84-89).

This dissertation contains three chapters in financial economics that theoretically and empirically examine how individuals' investment decisions explain aggregate behavior. The first chapter examines how reputational herding between fund managers depends on the fee structure, fund manager evaluation metric, market efficiency, and density of talented fund managers. Results show there are more equilibria involving herding between fund managers when net fund balance growth depends on reputation of talent rather than fund return. These inefficient equilibria are removed when the ratio of the performance fee rate to management fee rate is larger than calculated thresholds that depend on market efficiency and the density of talented fund managers. In the absence of performance fees, lower predictability of investment returns and a higher density of talented fund managers increase the desire for fund managers to deviate from efficient equilibria. The model also shows having fund managers compete against each other induces herding when net fund balance growth depends on fund returns, but removes herding equilibria when net fund balance growth depends on reputation of talent. The second chapter determines what herding networks exist between institutional investors and how herding depends on stock market volatility, degree of portfolio changes, and stock size. Using quarterly holding data from 2000-2010, I find stronger herding networks between similar types of institutions compared to institutions in the same metropolitan area. Furthermore, the herding network between similar types of institutions exists across metropolitan areas. Results show institutions herd more when making major portfolio changes than when making minor portfolio changes. The difference in herding between the two types of portfolio changes is greatest for small cap stocks which exhibit the highest levels of herding under both types of portfolio changes. The relationship between market volatility and herding by institutions is also examined and found not to have a strong correlation using quarterly holdings data. The third chapter answers the question, "Can reasonable wind energy plant cost reductions or efficiency improvements precipitate immediate investment in wind energy in the absence of renewable energy Production Tax Credits?" I analyze a single entity considering an irreversible investment under uncertainty in wind power energy. The investor's decision to invest is dependent on investment cost, energy production efficiency, government policy, current price of electricity, and beliefs on future electricity prices. The results show that even with substantial cost reductions and efficiency improvements, Production Tax Credits are still needed to encourage immediate investment. / text

One of the main challenges that investors in the Clean Development Mechanism (CDM) project face is the management of the volatility of the price of Certified Emission Reduction (CERs). Large scale CDM projects require a long-term investment with significant amount of costs, and this type of investment is often irreversible. Project investors should quantitatively assess the CER trigger price that justifies the initiation of a CDM investment. The traditional discounted cash flow valuation is unable to capture the option value associated with uncertain investment, and thus it tends to underestimate the trigger price which initiates the investment. Real options theory explicitly considers the option value of delayed investment and can provide a better measurement of the trigger price. This paper presents a theoretical model of the CDM investment project and derives the CER trigger prices that guide investment decisions by using historical market data. It develops a stochastic dynamic programming model for both the geometric Brownian motion process and the mean-reverting process. An analytical solution for the trigger price is derived for the former process, and the trigger price is numerically estimated for the latter. By considering various parameter values, it analyzes the effects of different market environments on the trigger price.

One of the main challenges that investors in the Clean Development Mechanism (CDM) project face is the management of the volatility of the price of Certified Emission Reduction (CERs). Large scale CDM projects require a long-term investment with significant amount of costs, and this type of investment is often irreversible. Project investors should quantitatively assess the CER trigger price that justifies the initiation of a CDM investment. The traditional discounted cash flow valuation is unable to capture the option value associated with uncertain investment, and thus it tends to underestimate the trigger price which initiates the investment. Real options theory explicitly considers the option value of delayed investment and can provide a better measurement of the trigger price. This paper presents a theoretical model of the CDM investment project and derives the CER trigger prices that guide investment decisions by using historical market data. It develops a stochastic dynamic programming model for both the geometric Brownian motion process and the mean-reverting process. An analytical solution for the trigger price is derived for the former process, and the trigger price is numerically estimated for the latter. By considering various parameter values, it analyzes the effects of different market environments on the trigger price.

Upon making an optimal timing decision, a player takes into consideration not only the actions of the other players, but also the uncertainty of the environment. I use the real options approach to study the strategic timing decisions of asymmetric firms in an environment with uncertainty. When firms make timing decisions, they take into account the opportunity cost of immediate action today. The second chapter studies the identification in an asymmetric duopoly. The two potential entrants contemplate entering a new market where the demand follows a geometric Brownian motion. I show that under certain parameter conditions there will be an equilibrium triggered by preemption, and both firms could preempt. Moreover, the equilibrium may no longer be only triggered by preemption. I identify the joint distribution of the unobserved investment costs and find the probability of the first entry being triggered by preemption. Given the observation of the first entrant, I can predict the probability of observing the second entrant. The third chapter studies the spillover effect of exit in a vertical relationship. I extend the methodology of irreversible investment under uncertainty to consider exits in a vertical market structure. When the exogenous demand shock is low, one party of the supply chain wants to exit first and will thus lead to the exit of the remaining party. The firm which wants to exit later strategically acts to delay the exit of its counterpart and therefore prevents its own exit. When the state level drops below the unique equilibrium exit threshold, both firms will exit simultaneously. The expected delay in exit timing is derived. The fourth chapter studies the strategic optimal timing of entry in the competition between one-way essential complements under demand uncertainty. The value of a new add-on to its consumers is uncertain. While the rational essential good producing firm recognizes the value of waiting under uncertainty when it contemplates entering the add-on market and endogenously self-selects between the two entry options- to produce or to acquire, the add-on producing firm strategically decides when to agree on acquisition. The impact of profit sharing in the case of acquisition and relative fixed costs of entry on the size and form of the waiting region and the responses of both firms are analyzed. / text

Diss. Göteborg : Göteborgs universitet, 2005.

Originally presented as the author's doctoral thesis to the European Business School, Oestrich-Winkel. / Description based on print version record. Includes bibliographical references and index.

Assignment (MComm)--University of Stellenbosch, 2006. / Bibliography. Also available via the Internet.