Management Views on Real Options in Capital Budgeting

Journal of Applied Finance, Forthcoming

30 Pages Posted: 31 May 2010 Last revised: 12 Feb 2011

See all articles by H. Kent Baker

H. Kent Baker

American University - Kogod School of Business

Shantanu Dutta

The University of Ontario Institute of Technology (UOIT)

Samir Saadi

Smith School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 15, 2010

Abstract

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.

Keywords: Real Options, capital Budgeting, Survey

JEL Classification: G30, G31

Suggested Citation

Baker, H. Kent and Dutta, Shantanu and Saadi, Samir, Management Views on Real Options in Capital Budgeting (May 15, 2010). Journal of Applied Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1617927

H. Kent Baker (Contact Author)

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States
202-885-1949 (Phone)
202-885-1992 (Fax)

Shantanu Dutta

The University of Ontario Institute of Technology (UOIT) ( email )

2000 Simcoe Street North
Oshawa, Ontario L1H 7K4
Canada

Samir Saadi

Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

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