Real options and the impact of intellectual capital on corporate value

Abstract

Purpose -The aim of this paper is to discuss intellectual capital (IC) from a valuation perspective and examine the nature of such capital and why traditional valuation methods fail to reflect the unique characteristics of IC and propose an alternative approach that captures them. Design/methodology/approach -The paper builds on the existing literature in the fields of financial valuation and IC. The analysis of these fields allows us to combine them and discuss the possible usage and limitations of real option models for the assessment of intellectual capital in firms. Findings -A valuation perspective is developed based on the real option models that have been extended from their origin in financial asset valuation to the valuation of firms' growth opportunities. Intellectual resources embody these opportunities contributing to both their evolution over time and their realisation in future. A typology of IC is developed based on the influence upon the various valuation parameters of real options. This approach provides a richer framework to analyse the relationship between IC and corporate value. Practical implications -Clarification of the relationship between IC and managerial flexibility as a source of value will help managers understand how they can create and leverage such flexibility to create value. The paper enables managers to understand how different types of IC impact on risk taking, timing of investment projects and the value of speculative investments. Originality/value -The paper clarifies the nature of IC in the way it contributes to managerial flexibility to gain competitive advantage and exploit growth opportunities. It extends the real options valuation framework to the valuation of intellectual assets thus providing a link among intellectual assets, business strategy and firm value.

Firm Life Cycle and the Value Relevance of Intangible Assets: The Impact of FRS 138 Adoption

“…Viewing [17] distinction between assets-in-place and growth opportunities as tangible and intangible assets, respectively, is also consistent with [3], [19]. This suggests that intangible assets, in general, contribute to a firm's value creation as they give rise to growth opportunities [3], [17], [21], [22]. Exploitation of these growth opportunities requires investments and whether such investments will be made depends on the result of initial investments to develop intangible assets.…”

The Role of Intellectual Capital Value in the Organization

“…Intellectual capital in innovation, productivity, growth, business competitiveness and economic performance has fundamental importance (Lim & Dallimore, 2004). These assets will improve opportunities of organization (Sudarsanam & et al, 2006). Measurement of intellectual capital is an important step in determining how to improve overall productivity of the organization (Nooralizad & et al, 2014).…”

Incremental performance of an eChannel addition

“…The BS-M model is the first to consider leveraged firm equity as an option in calculating firm value (Copeland and Weston, 2006), and is the most widely used model in evaluating option contracts (Cron and Hayes 2007). The model is also one of the most outstanding financial economic models (Sudarsanam et al, 2006).…”