•Reviews 164 papers from five internationally-renowned journals between 2004 and 2015.•Papers employ the Real Options approach to Operations Research settings/problems.•Catalogues 6 subject themes ...where the Real Options approach has been most valuable.•Identifies, per theme, the main modeling approaches, key issues and sub-categories.•Documents current trends and suggests promising directions for future research.
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.
Real options theory in international business Chi, Tailan; Li, Jing; Trigeorgis, Lenos G ...
Journal of international business studies,
06/2019, Volume:
50, Issue:
4
Journal Article
Peer reviewed
The last quarter century has witnessed substantial growth in applications of real options theory (ROT) to international business (IB) research. In this review, we explicate the core ROT concepts in ...the IB context and discuss the contributions of ROT-based research to three core IB issues: timing and scale of market entry or exit, entry mode and governance form, and the role of multinational networks. Based on our review, we propose a holistic ROT view of the multinational enterprise that synthesizes the insights of existing studies. Finally, to move the field forward, we highlight key questions and challenges in current ROT-based work, provide a more precise definition of exogenous and endogenous uncertainty, suggest empirical designs to test unique ROT predictions, and explore areas where ROT can be combined with other theoretical perspectives to better understand IB phenomena.
ABSTRACT
Pay‐for‐success contracts are social and financial innovations in social policy and capital markets, respectively. This paper argues that they exhibit option‐like payoffs and implements ...standard option‐pricing arguments in assessing the value of investing in pay‐for‐success contracts. Sensitivities vis‐à‐vis contract specifications are reflected in the valuation formula and help reach investment and social policy decisions. These sensitivities are demonstrated via a numerical application that uses parameters drawn from the Massachusetts Juvenile Justice Pay for Success Initiative, the largest pay‐for‐success initiative in the United States at the time of its launch.
Past research has documented a substitution effect between real earnings management (RM) and accrual-based earnings management (AM), depending on relative costs. This study contributes to this ...research by examining whether levels of (and changes in) financial leverage have an impact on this empirically documented trade-off. We hypothesise that in the presence of high leverage, firms that engage in earnings manipulation tactics will exhibit a preference for RM due to a lower possibility - and subsequent costs - of getting caught. We show that leverage levels and increases positively and significantly affect upward RM, with no significant effect on income-increasing AM, while our findings point towards a complementarity effect between unexpected levels of RM and AM for firms with very high leverage levels and changes. This is interpreted as an indication that high leverage could attract heavy outsider scrutiny, making it necessary for firms to use both forms of earnings management in order to achieve earnings targets. Furthermore, we document that equity investors exhibit a significantly stronger penalising reaction to AM vs. RM, indicating that leverage-induced RM is not as easily detectable by market participants as debt-induced AM, despite the fact that the former could imply deviation from optimal business practices.
We examine the association between enhancement in a firm's information environment via options trading and firm investment efficiency. Investment inefficiency is partly driven by information ...asymmetries between firm managers and capital providers, aggravating moral hazard concerns. We test whether enhancement in a firm's information environment through higher volumes of options trading (including a natural experiment involving exogenous shocks via the Penny Pilot Program) is positively related to more efficient firm investment decisions. Our results confirm that enhanced informational efficiency via higher volumes of options trading is positively related to improvements in firm-level investment efficiency. Our findings are in line with the enhancement in the information environment stemming from options trading reducing agency and moral hazard concerns (an agency channel) and are not driven by alternative explanations such as managerial learning from informed traders or a lower cost of capital. Overall, our findings suggest that an enhanced information environment via more options trading benefits firms’ investment decisions.
The impact of online reputation on hotel profitability Anagnostopoulou, Seraina C; Buhalis, Dimitrios; Kountouri, Ioanna L ...
International journal of contemporary hospitality management,
01/2020, Volume:
32, Issue:
1
Journal Article
Peer reviewed
Open access
Purpose
The purpose of this study is to quantify the impact of online customer reputation on financial profitability.
Design/methodology/approach
Online reputation is captured by extracting the most ...recurring textual themes associated with customer satisfaction and dissatisfaction, expressed within positive vs negative online guest reviews on Booking.com. Latent semantic analysis is used for textual analysis. Proxies of overall financial performance are manually constructed for the sample hotels, using financial data from the Financial Analysis Made Easy (FAME) database. Ordinary least squares is used to gauge the effect of online customer reputation on financial profitability.
Findings
Empirical findings indicate that recurring textual themes from positive online reviews (in contrast to negative reviews) exhibit a higher degree of homogeneity and consensus. The themes repeated in positive, but not in negative reviews, are found to significantly associate with hotel financial performance. Results contribute to the discussion about the measurable effect of online reputation on financial performance.
Originality/value
Contemporary quantitative methods are used to extract online reputation for a sample of UK hotels and associate this reputation with bottom-line financial profitability. The relationship between online reputation, as manifested within hotel guest reviews, and the financial performance of hotels is examined. Financial profitability is the result of revenues, reduced by the costs incurred in order to be able to offer a given level of service. Previous studies have mainly focused on basic measures of performance, i.e. revenue generation, rather than bottom-line profitability. By combining online guest reviews from travel websites (Booking.com) with financial measures of enterprise performance (FAME), this study makes a meaningful contribution to the strategic management of hotel businesses.
•Study optimal switching problems under “fast” mean-reverting stochastic volatility.•Derive closed-form approximations of the full problem via homogenization theory.•Apply our general solution to ...well-known switching problems and volatility models.•Proposed method is of interest to applied problems involving switching flexibility.
We study infinite-horizon, optimal switching problems for underlying processes that exhibiting “fast” mean-reverting stochastic volatility. We obtain closed-form analytic approximations of the solution for the resulting quasi-variational inequalities, that provide quantitative and qualitative results for the effects of multi-scale variability of the underlying process on the optimal switching rule. The proposed methodology is applicable to a number of operations research problems involving switching flexibility.
Empirical evidence regarding accrual-based earnings management around mergers and acquisitions has been setting-specific as far as target firms are concerned. This might be due to the fact that ...target firms cannot always anticipate an acquisition proposal, and thus lack the motive and the time necessary to manage their earnings in order to facilitate or impede the deal. In this paper, we provide clear evidence of downward earnings management by a sample of target firms that have both time and motive to engage in such actions. These are firms that publicly announce their intention to be acquired. Publicly ‘seeking a buyer’ represents a rather unusual corporate event, and we find that these firms engage in downward earnings management in the years surrounding the ‘announcement year’. To some extent, this result is explained by overrepresentation of low performance and growth among these firms, and it can be interpreted under alternative explanations. Furthermore, we show that such downward earnings management negatively affects the probability for a ‘seeking buyer’ firm to secure an acquisition within a reasonable amount of time, a possible indication of efficient diligence by prospective buyers having a preference for firms ‘seeking buyer’ with no informationally obscure earnings.
Due to the high levels of flexibility and uncertainty associated with the deployment of RFID technology in the supply chain (e.g. alternative investment implementations based on the number of ...RFID-enabled processes or the different supply-chain nodes involved—e.g. stores, warehouses etc.), Real Options analysis becomes strongly suitable. In contrast to the few previous works that demonstrate the suitability of Real Options analysis for RFID investments through hypothetical numerical examples, this paper employs empirical data from a real case firm: 3E Coca-Cola HBC Greece. The proposed model for the case application addresses the simultaneous optimization of RFID investment timing and scale, in the face of (a) substantial uncertainty regarding the products circulated from and among the firm’s premises and (b) largely irreversible investment costs associated with RFID adoption (hardware infrastructure, tags, training and maintenance, etc.). A unique feature of our proposed modelling framework, with implications for a range of other supply chain information technologies with characteristics similar to RFID, is the explicit determination of the volatility of cash flows/revenues that will accrue from adopting the RFID technology from the volatility of RFID tagged items that are circulated from and among the business nodes. This alleviates the need to approximate or estimate the state-variable volatility (undeniably the most difficult parameter to infer in real options applications) through inaccurate or other questionable methods that have been employed in similar case studies in the literature.
•Examines suitability of Real Options for RFID investments with data from a case firm.•Addresses the simultaneous optimization of RFID investment timing and scale options.•Volatility of tagged items circulated explicitly determines volatility of RFID adoption profits.•This last feature applies to broad range of supply chain IT investments, similar to RFID.
Many economic variables of interest exhibit a tendency to revert to predictable long-run levels. However, mean reverting processes are rarely used in investment models in the literature. In most ...models, geometric Brownian motion processes are used for tractability. In this paper, a firm's entry and exit decisions when the output equilibrium price follows an exogenous mean reverting process are examined, and then compared to the decisions of the firm under the usually employed assumption of lognormally distributed output price, presented in
Dixit (1989a). By extending previous work by
Sarkar (2003) to account for costly reversibility, we show that mean reversion has a significant effect, not only on firm-specific entry and exit decisions, but also on the balance of entering and exiting firms in an industry/market. Thus it would be erroneous to use the more tractable geometric Brownian motion process as an approximation for a mean-reverting process in models and investigations of aggregate industry investment.
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