Do organizations adopt sophisticated capital budgeting practices to deal with uncertainty in the investment decision?

Verbeeten, F.H.M.

doi:10.1016/j.mar.2005.07.002

Cited by 114 publications

(161 citation statements)

References 40 publications

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“…We also have to admit that we cannot ultimately predict the potential acceptance of our approach in corporate practice. However, as demonstrated in Verbeeten's (2006) study, highly uncertain environments increase firms' willingness to adopt more sophisticated capital budgeting practices. As R&D is typically associated with high levels of uncertainty, we think that implementing our approach is most likely in R&D management (also see Hartmann and Hassan 2006).…”

Section: Discussionmentioning

confidence: 90%

Modeling sequential R&D investments: a binomial compound option approach

Hauschild

Reimsbach

2014

Bus Res

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In this paper, we propose a binomial approach to modeling sequential R&D investments. More specifically, we present a compound real options approach, simplifying the existing valuation methodology. Based upon the same set of assumptions as prior models, we show that the number of computational steps for valuing any compound option can be reduced to a single step. We demonstrate the applicability of our approach using the real-world example of valuing a new drug application. Overall, our work provides a heuristic framework for fostering the adoption of binomial compound option valuation techniques in R&D management.

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Section: Discussionmentioning

confidence: 90%

Modeling sequential R&D investments: a binomial compound option approach

Hauschild

Reimsbach

2014

Bus Res

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“…A significant proportion of this literature has focused on the extent to which decision makers' intuition is consistent with real-option theory (Busby & Pitts, 1997;Howell & Jägle, 1997;Remer, Ang & Baden-Fuller, 2001;Verbeeten, 2006) and there is general agreement that biotechnology/pharmaceuticals firms' market value can be considered as the value of a basket of real options on their R&D portfolio (Ely et al, 2003;Woerner & Grupp, 2003;Hartman & Hassan, 2006). A theme is this literature is a call for better educated decision makers to realise the benefits of the real-options approach for investment appraisal.…”

Section: Resultsmentioning

confidence: 99%

“…However, it is generally accepted that the application of real-options as an investment appraisal technique has been limited due to its complexity and because the evidence examining the association between decision-makers' intuition and real-option theory is mixed (Busby & Pitts, 1997;Howell & Jägle, 1997;Remer, Ang & Baden-Fuller, 2001;Verbeeten, 2006). While it is evident that there is considerable variation in the application and understanding of real-options generally, the biotechnology/pharmaceuticals sector is 16 often cited as an industry where real options analysis is applicable and where firms' market value can be considered as the value of a basket of real options on their R&D portfolio (Ely et al, 2003;Woerner & Grupp, 2003;Hartman & Hassan, 2006).…”

mentioning

confidence: 99%

Valuation implications of pharmaceutical companies' R&D regulatory approval notifications

Hamill

McIlkenny

Opong

2013

The British Accounting Review

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“…Even if qualitative criteria is incorporated in the SID, there is a lack of structured and validated methodologies [23], [24]. However, scientists argue that an organization's philosophy itself and organizational context vary across circumstantial settings [25], [26].…”

Section: State Of the Artmentioning

confidence: 99%

Long Term Examination of the Profitability Estimation Focused on Benefits

Printz

Lahl

Vossen

et al. 2016

Automation, Communication and Cybernetics in Science and Engineering 2015/2016

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Abstract-Strategic investment decisions are characterized by high innovation potential and long-term effects on the competitiveness of enterprises. Due to the uncertainty and risks involved in this complex decision making process, the need arises for well-structured support activities. A method that considers cost and the long-term added value is the cost-benefit effectiveness estimation. One of those methods is the "profitability estimation focused on benefits -PEFB"-method developed at the Institute of Management Cybernetics at RWTH Aachen University. The method copes with the challenges associated with strategic investment decisions by integrating long-term non-monetary aspects whilst also mapping the chronological sequence of an investment within the organization's target system. Thus, this method is characterized as a holistic approach for the evaluation of costs and benefits of an investment. This participation-oriented method was applied to business environments in many workshops. The results of the workshops are a library of more than 96 cost aspects, as well as 122 benefit aspects. These aspects are preprocessed and comparatively analyzed with regards to their alignment to a series of risk levels. For the first time, an accumulation and a distribution of cost and benefit aspects regarding their impact and probability of occurrence are given. The results give evidence that the PEFB-method combines precise measures of financial accounting with the incorporation of benefits. Finally, the results constitute the basics for using information technology and data science for decision support when applying within the PEFB-method.Keywords-Cost-benefit analysis, multi-criteria decision, profitability estimation focused on benefits, risk and uncertainty analysis.

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Do organizations adopt sophisticated capital budgeting practices to deal with uncertainty in the investment decision?

Cited by 114 publications

References 40 publications

Modeling sequential R&D investments: a binomial compound option approach

Modeling sequential R&D investments: a binomial compound option approach

Valuation implications of pharmaceutical companies' R&D regulatory approval notifications

Long Term Examination of the Profitability Estimation Focused on Benefits

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