Infrastructure Investment as a Real Options Game: The Case of European Airport Expansion

Capital Budgeting Theory and Practice: A review and agenda for future research

“…In such a situation, Real Options Reasoning (ROR) and Game Theory (GT) serves as better analytical tools to evaluate such investment projects (Smit and Ankum, 1993). GT stresses that firm is having an incentive to invest early in the case of fear of pre-emption (Smit, 2003) …”

“…Scholarship on the practice of capital budgeting in many countries has found that firms are increasingly employing more sophisticated capital budgeting techniques in order to make investment decisions over several years (Klammer, 1973;Klammer and Walker,1984;Pike,1988;Jog and Srivastava,1995;Gilbert and Reichart,1995;Farragher, Kleiman and Sahu,1999;Arnold and Hatzopoulos, 2000;Brounen, de Jong and Koedijk, 2004;Truong, Partington and Peat,2008;Baker, Dutta and Saadi,2011). In the contemporary world, there are a number of sophisticated capital budgeting methods including the oft-cited: Monte Carlo Simulations, Game theory decision rules , Real option pricing, Using certainty equivalents, Decision trees, CAPM analysis / ß analysis, Adjusting expected values, Sensitivity analysis/break-even analysis, Scenario analysis, Adaptation of required return/discount rate, IRR, NPV, uncertainty absorption in cash flows, and PB (e.g., Arnold and Hatzopoulos, 2000;Hall, 2000;Graham and Harvey, 2001;Ryan and Ryan, 2002;Murto and Keppo, 2002;Cooper et al, 2002;Smit, 2003;Sandahl and Sjogren, 2003;Brounen, de Jong, and Koedijk 2004;Lazaridis, 2004;Lord, Shanahan and Bogd, 2004;du Toit and Pienaar, 2005;Verbeeten, 2006;Elumilade, Asaolu and Ologunde, 2006;Hermes, Smid, and Yao , 2007;Leon, Isa and Kester, 2008;Correia and Cramer, 2008;Verma, Gupta and Batra, 2009;Bennouna, Meredith and Marchant, 2010;Shinoda, 2010;Hall and Millard, 2010;Dragota et al, 2010;Poudel et al, 2009;Kester and Robbins, 2011;Maroyi and Poll, 2012;…”

Developing real option game models

“…Smit (2003) focuses on the optional and strategic features of infrastructure investments to investigate his intuition that infrastructure investments generate other investment opportunities and, in doing so, change the strategic position of the firm.…”

Developing Real Option Game Models

“…However, in sequential continuous-time ROG there is no definition for "the last period" and the "next period". This introduces potential time-consistency problems since it restricts the set of 16 Some exceptions are Smit and Ankum (1993), Kulatilaka and Perotti (1998), Smit (2003), Murto et al (2004) and Smit and Trigeorgis (2004, chapters 4, 5, 6 and 7), who use discrete-time frameworks. 17 Notice that in ROG the focus of the analysis is directed not to the "timing strategy", chronologically speaking, but to the time at which the value of the investment reaches a threshold, regardless of at which chronological point in time that occurs.…”