Real Options in Divestment Alternatives

Posted: 22 Apr 2011 Last revised: 29 May 2014

Nagalakshmi Damaraju

Indian School of Business (ISB), Hyderabad

Jay B. Barney

Ohio State University (OSU) - Human Resource Research

Anil K. Makhija

Ohio State University (OSU) - Department of Finance

Date Written: April 19, 2011

Abstract

This paper examines the implications of real options theory for both the decision to divest a business unit and the mode of divestment. It is shown that the decision to divest a business unit and the decision to engage in staged modes of divestment are both sensitive to uncertainty, consistent with the real options logic. However, in the face of uncertainty, the results suggest that staged forms of governance create real options that are of lesser value as compared to simply not divesting a business unit. Thus, this study shows that firms have real options of varied value to choose from in the context of divestments.

Keywords: Real options, Divestments, Divestment mode choices, Uncertainty

Suggested Citation

Damaraju, Nagalakshmi and Barney, Jay B. and Makhija, Anil K., Real Options in Divestment Alternatives (April 19, 2011). Indian School of Business WP ISB-WP/101/2011. Available at SSRN: https://ssrn.com/abstract=1815124 or http://dx.doi.org/10.2139/ssrn.1815124

Nagalakshmi Damaraju (Contact Author)

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Jay Barney

Ohio State University (OSU) - Human Resource Research ( email )

700 Fisher Hall
2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-3161 (Phone)

Anil K. Makhija

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-1899 (Phone)

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