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We study capacity investment decisions among oligopoly firms under conditions of cost heterogeneity and output flexibility within capacity constraints. Output flexibility causes the value of the firm to be convex in the state of demand, which implies that the firm invests in larger capacity when the economic environment is more uncertain. Under cost heterogeneity among oligopoly firms, a lower-cost firm invests in larger capacity, while a less efficient rival chooses lower capacity as capacities are strategic substitutes. Consequently, higher uncertainty leads to more dispersion of equilibrium capacities and greater industry concentration. More competition thus induces a welfare loss when uncertainty and cost heterogeneity are high. (C) 2020 Elsevier B.V. All rights reserved.

This paper studies the antecedents of cognitive options appraisal in a cross-cultural sample of specialists and generalists. Examining the role of national culture and ambiguity in the real option logic, we show that individuals have more propensity to intuitively value options opportunities using ambiguity-based approaches than standard Bayesian benchmarks, and identify the drivers behind such behavioral deviations. We find that knowledge and cultural factors, along with age, gender and international life experience, influence subjective real options values and ambiguity attitudes. Results also confirm the higher tolerance for uncertainty of the Chinese relative to others.

This study contributes to our understanding of what accruals capture and how they relate to the distribution of future returns. It examines the past and future growth components of accruals and shows that, whereas past growth is negatively associated with idiosyncratic skewness, future growth is positively associated with it. In addition, although both past and future growth are negatively associated with future returns, the association is more pronounced for past growth when volatility is lower, but for future growth when volatility is higher. The study also shows that the association between the future growth component and future returns reverses in the long run, whereas the association between past growth and future returns does not. This paper was accepted by Shivaram Rajgopal, accounting.

Purpose of the study : How to best structure an IP licensing agreement taking account of embedded optionalities and other terms negotiated between licensor and licensee via a case study involving a prototypical options-based business model (biotech industry). Methodology : Binomial lattice simulation. Findings : It shows how IP management practices would change depending on who pays for the development costs, controls the continuation/development or abandonment option and thereby appropriates most of the embedded option’s value. It presents alternative (iso-value) menu licensing term choices (different combinations of royalty vs. fixed upfront fee or milestone payments) that are fair and optimal in properly accounting for the optionality embedded in RD (b) consider licensor and licensee perspectives in negotiating the terms of the IP licensing agreement, providing guidelines on how to determine its optimal remuneration structure reflecting a fair sharing of project value and embedded optionality among the parties; (c) offer a tool for IP portfolio management that helps a licensor prioritize internal R&D projects accounting for managerial flexibility and optimal licensing design under uncertainty.

This paper examines the relationship between investors' ambiguity in the financial options market and systemic banks' risk. Eliciting ambiguity information from option pricing data on the twelve major U.S. banks between 2003 and 2010, we show that higher behavioral deviations from risk-neutral and Bayesian valuation (i.e., investor ambiguity) are associated with higher systemic banks' downside, market and credit risks. Consistent with behavioral explanations, we confirm the detrimental effect of ambiguity on financial market outcomes and find strong evidence of ambiguity among call and put option holders. Variance decomposition indicates that such a pattern of behavior explains a significant proportion of U.S. banking risk variance. This effect is more pronounced during periods of economic turbulence and bank stress (i.e., the 2007–2009 crisis), and holds after controlling for size, tail risk, implied volatility, and volatility of volatility dynamics. We also document that ambiguity from the financial market has a depressing impact on real economic activity, including capacity utilization, non-farm payrolls and overall economic performance. Our findings are robust to alternative specifications of ambiguity such as multiple priors and expected utilities with uncertain probabilities.

The Real Options approach to decision-making has been useful in capturing and valuing the flexibility inherent in many operating decisions that decision makers are faced with. In Operations Research (OR), a field that encompasses a plethora of problem-solving techniques for improving decision-making, we note an observable steady increase in contributions that apply the Real Options approach to model, analyze and evaluate flexible operating alternatives available to decision-makers or to optimize the operational efficiency of decision timing. We review 164 papers that appeared in five internationally-renowned OR journals in the last twelve years, cataloguing the main subject themes and contributions where the Real Options approach has been most valuable to Operations Research. We classify the reviewed papers into six main subject themes, and identify their main characteristics, the modeling approaches used, key issues and sub-categories. We further document current trends and suggest promising opportunities for future research.

The original version of this paper was inadvertently published without one of the co-authors’ affiliations. Lenos G. Trigeorgis has an additional affiliation as follows

This article addresses key issues of the Greek sovereign debt crisis, its broader economic distress and growth implications for the Euro Area and offers suggested remedies including growth indexed bonds, fiscal balances over a growth cycle, structural reforms, and using real option analysis in relevant public policy areas involving inefficient or growth sectors of the economy.

We extend and complement prior work by investigating the earnings quality of firms with different financial health characteristics and growth prospects. By using three alternative measures of default likelihood and two alternative measures of growth options, without being limited to a specific event, we provide a more comprehensive setup for analysing the earnings characteristics of the universe of firms than examining distressed firms with persistent losses, dividend reductions or bankruptcy-filings. Our dataset consists of 15,049 healthy U.S. firms over the period 1990–2004. Results show that the relation between earnings quality and financial health is not monotonic. Distressed firms have a low level of earnings timeliness for bad news and a high level for good news, and manage earnings toward a positive target more frequently than healthy firms. On the other hand, healthy firms have a high level of earnings timeliness for bad news. Growth aspects play an important role in a firm's ability to manage earnings. In contrast to the findings of prior studies, growth firms have greater earnings timeliness for bad news, whereas value firms manage earnings toward a positive target more frequently than growth firms.

The incentive to \overinvest" in capital may be eroded in dynamic, competitive settings if rms face uncertainty and irreversibility. In this paper, we derive the stationary Markov perfect equilibrium for a dynamic, innite-horizon capacity investment game formulated in continuous time in which reduced-form prots are subject to industry shocks. We show that the theory of marginal Tobin’s

This article presents an evolutionary cooperative approach to conflict resolution that would lower the fears and raise the hopes of parties in conflict by proceeding incrementally in phases that would allow interaction and reciprocity, learning, and flexibility (through options to expand or abandon cooperation/integration). With reference to the Cyprus conflict, although initially maintaining two separate decentralized zones, the simultaneous creation of a third, joint federated area to serve as the nucleus of a cooperative, interactive, centralized federation is proposed. A “conciliation stage” should precede a federated structure “testing” phase, before expanding and ratifying full-scale implementation contingent on successful interim cohabitation.

This paper explains why cost-reimbursed not-for-profits (NFPs) have incentives to use debt financing when purchasing capital assets. When the purchase is internally financed (i.e., through retained earnings), NPV is negative and the NFP lacks incentives for efficient investment. But when financed through debt with reimbursed (‘passed through’) interest, earlier reimbursed depreciation recovery relative to delayed principal costs can lead to positive NPV and excessive reimbursement. This analysis may thus help explain an empirical regularity, namely that NFPs tend to be highly leveraged despite the absence of tax shields or the availability of internal funds. This regularity cannot be explained either by the ‘trade-off’ or by the ‘pecking order’ theories of capital structure.

The telecommunications sector is one of the most innovative, high-growth, capitalintensive yet volatile sector of the economy. This research addresses critical concerns of how, when, and why an enterprise or a service provider should undertake new investments. The study investigates the power of flexibility in investment decision making process, by applying the real options methodology. Five case applications are studied: a) investment decisions in next generation wireless networks; b) investing in integrated wireless networks; c) migration to wireless broadband internet services; d) valuing deployment of Wi-Fi networks in enterprise markets; and e) valuing Hosted VOIP services for enterprise markets. The case studies are analyzed both qualitatively and quantitatively.

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This article serves two main purposes. First, it aims to provide a comprehensive overview of the existing real options literature and applications, as well as to present practically useful principles for quantifying the value of various real options. Second, it takes a first step towards extending the real options literature to recognize various interactions with financial flexibility. Overall, the paper illustrates how to practically analyze managerial flexibility in the case of various types of both real as well as financial options, recognizing that these option values may interact.