Management Views on Real Options in Capital Budgeting
H. Kent Baker
American University - Kogod School of Business
The University of Ontario Institute of Technology (UOIT)
Queen's School of Business
May 15, 2010
Journal of Applied Finance, Forthcoming
We survey a large sample of Canadian firms to first learn whether they use real options, the types of real options used, and why firms do not use them. Only 36 of the 214 respondents (16.8%) report using real options, which ranks last among nine capital budgeting techniques. The main reason for using real options is to provide a management tool to help form a strategic vision. The most commonly used real options are growth options and options to defer. Managers report that a lack of expertise and knowledge prevents them from using real options. Our evidence suggests that contrary to optimistic predictions, the use of real options appears disproportionate to their potential as a capital budgeting tool.
Number of Pages in PDF File: 30
Keywords: Real Options, capital Budgeting, Survey
JEL Classification: G30, G31Accepted Paper Series
Date posted: May 31, 2010 ; Last revised: February 12, 2011
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