Real Options and Investment Incentives

Front Cover
Springer Science & Business Media, Mar 7, 2007 - Business & Economics - 119 pages

Many large corporations delegate investment decision-making authority to their divisions. Because they are better informed, divisional managers should be able to make better decisions than corporate headquarters. However, they can use this informational advantage to pursue their own interests. The objective of this work is to analyze the problem of delegated decision-making within firms when investment projects are characterized by the possibility to make subsequent decisions after the initial investment decision has been made. By analyzing this question, the monograph combines and unifies two important lines of literature: on the one hand the literature on controlling investment decisions, on the other hand the investment valuation literature.

 

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Contents

Institutional and Methodological Background for the Analysis of Investment Incentives
7
212 Decentralization Asymmetric Information and Its Consequences for Incentive Problems
11
213 Types of Incentive Problems for Corporate Investment Decisions
13
22 Instruments for Controlling Capital Investment Decisions
15
222 Capital Budgeting and Capital Rationing
17
223 The Use of PerformanceBased Compensation
23
23 Appropriateness of Various Theoretical Methodologies for the Analysis
32
232 PrincipalAgent Models
33
43 Design Alternatives for the Residual Income Performance Measure
61
432 Recording the Option Value
64
433 Discussion of Recording the Option Value
66
44 Applying the Results to Different Types of Real Options
68
442 Business Acquisitions
69
45 Implications for the Design of the Residual Income Performance Measure
70
Residual Income as a Performance Measure in the Presence of Waiting Options
73
52 Description of the Basic Model
76

233 Goal Congruence Models
35
Capital Rationing as an Incentive Instrument for Growth Options
37
32 Theoretical Results on Capital Budgeting and Growth Options
39
33 Analysis of a Model on Incentive Problems for Growth Options
41
332 Solution of the Model
44
333 Relaxation of the Participation Constraints
46
334 Comparison of the Investment Rules
48
34 Changing Uncertainty over Investment Costs
50
35 Implications for Capital Budgeting Procedures
52
Residual Income as a Performance Measure for Switching Options
55
42 Modelling Investment in a Flexible Manufacturing System
58
422 Headquarters Objective
59
423 Goal Congruence and Managers Objective
60
53 Comparison of Alternative Residual IncomeBased Performance Measures
78
532 Capitalization of the Option Value
80
533 Raising the Hurdle Rate
82
54 Extending the Project Life to Many Periods
85
55 Advantages and Disadvantages of the Proposed Design Alternatives
88
56 Implications for Corporate Practice and Further Research
90
Implications and Conclusions
91
62 Limitations of the Analysis
93
63 Empirical Implications
94
64 Extensions and Further Theoretical Research
96
Appendix
97
References
109
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