Valuing Intangible Assets Through Real Options Theory: Some Critical Remarks

Abstract

Employing Real Options Theory (ROT) for intangible assets’ valuation seems to be very promising. Nevertheless, the ROT attitude for valuing “fluid” situations, where a pre-ordinate path to follow does not exist, can easily disguise the complexity of intangible assets’ valuation.

This paper develops two critical remarks on ROT-based valuation of intangible assets (IA). Firstly, IA can influence on the level of the uncertainty a firm deals with, therefore influencing on the value of the available real options. Literature on real options points out that an increase in uncertainty determines an increase in the value of the option. The intangible assets’ influence on uncertainty can produce, however, counter-intuitive effects on the value of a real option.

Secondly, ROT assumes that a twin security of the real option’s underlying asset exists in order to perform the valuation. Since IA are generally firm-specific and difficult to replicate by other firms, the existence of the twin security cannot be taken for granted. The consequence is that indeterminate results can arise.

The considerations just highlighted can support the development of a new approach, where the real options lens is a conceptual framework for interpreting and analysing economic phenomena while standard valuation is left on the background.

Keywords: Real Options Theory, Intangible Assets’ Valuation, Market Completeness, Risk, Uncertainty

JEL Classification: G31, M21