Multi-stage product development with exploration, value-enhancing, preemptive and innovation options

Koussis, Nicos; Martzoukos, Spiros H.; Trigeorgis, Lenos

doi:10.1016/j.jbankfin.2012.08.020

Cited by 20 publications

(13 citation statements)

References 26 publications

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“…He shows how firms do not necessarily wait for a future technological breakthrough, but instead may delay the adoption of a new technology until it has been sufficiently refined. More recently, Koussis et al (2013) model market uncertainty via a jump-diffusion process that allows for multiple classes of jumps, and, in turn, for the flexibility to model different independent risks affecting a firm, e.g., entry of differentiated products and technological uncertainty.…”

Section: Literature Reviewmentioning

confidence: 99%

Optimal regime switching under risk aversion and uncertainty

Chronopoulos

Lumbreras

2017

European Journal of Operational Research

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Highlights• We develop a regime-switching, utility-based framework for sequential investment• Greater price uncertainty and risk aversion may accelerate regime switching• Greater risk aversion promotes a compulsive and a laggard regime-switching strategy • Higher output price or innovation rate mitigates the impact of risk aversion• A leapfrog/laggard strategy may dominate even when a decisionmaker is risk averse

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Section: Literature Reviewmentioning

confidence: 99%

Optimal regime switching under risk aversion and uncertainty

Chronopoulos

Lumbreras

2017

European Journal of Operational Research

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“…Valuing (sequential) R&D projects has thus received much attention in academia and corporate practice (e.g., Amram et al 2006;Cassimon et al 2011a;Nichols 1994). In this regard, it is well acknowledged among researchers and practitioners that R&D investments represent real options to the investing firm (Huchzermeier and Loch 2001;Koussis et al 2013;Pennings and Lint 1997;Perlitz et al 1999). As such, R&D projects typically do not lead to immediate cash flows but open up further investment opportunities.…”

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confidence: 99%

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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“…Our algorithm applies an exhaustive search among a grid of plowback choices at t = 0 (ranging from 0 to 100% with small increments), then goes forward and for each end-state at T 1 evaluates the optimal plowback using a new grid search for plowback choices, goes backwards to find firm value at t = 0 and then repeats the process using new plowback choices at t = 0 until the level that maximizes firm value is obtained. Further details on construction of binomial trees using a forward-backward approach are provided in Koussis et al (2013). 19 The lattice parameters for the up and down multiplicative jumps and the up and down probabilities are: Note: In panel A we assume P 0 =100, operating costs C e = 80, zero debt (C R = 0, b =1), τ = 0.3, r = r x = 0.036, δ = 0.05, σ = 0.2, T 1 =5, T 2 = 10 years and variable external financing costs v E = 0.1.…”

Section: Accepted Manuscript 42mentioning

confidence: 99%

Corporate liquidity and dividend policy under uncertainty

Koussis

Martzoukos

Trigeorgis

2017

Journal of Banking & Finance

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We examine optimal liquidity (retained earnings) and dividend choice incorporating debt financing with risk of default and bankruptcy costs as well as growth options under revenue uncertainty. We revisit the conditions for dividend policy irrelevancy and the broader role of retained earnings and dividends.Retained earnings have a net positive impact on firm value in the presence of growth options, high external financing costs and low default risk. High levels of retained earnings enhance debt capacity but have a negative effect on equity value due to the likelihood of losing accumulated cash balances in case of default, unless offset by high external financing costs. Opposite directional effects of retained earnings on equity and debt create a U-shaped relation with firm value. The framework is extended to analyze management-shareholder conflicts, demonstrating that managers accumulate higher than optimal cash. JEL classification: G31, G13

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Multi-stage product development with exploration, value-enhancing, preemptive and innovation options

Cited by 20 publications

References 26 publications

Optimal regime switching under risk aversion and uncertainty

Optimal regime switching under risk aversion and uncertainty

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

Corporate liquidity and dividend policy under uncertainty

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