Analysis of Studies from 2000-2010 in Real Option Theory and Application to OM
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Abstract
Traditional project investment methods, such as the discounted cash flow (DCF) with a fixed static plan, are no longer sufficient to assist the corporate strategies of seizing opportunities and profitability. The option pricing formula includes a theoretical framework for pricing financial options, assuming that the risk in a financial hedged position is zero, if the option is adjusted continuously in a short position. Hence, the real options revolution arose in response to the dissatisfaction of corporation practitioners with traditional capital budgeting techniques, such as standard discount cash flow. This paper analyzes relevant articles from the “Journal of Operations Management” and “Management Sciences” as related to real options theory in the field of operations management. The goal of this study is to review and identify the gaps in application to real option theory in their studies. Finally, this paper provides suggestions for future researchers.
- Yeo, K.T. & Qiu, F. (2003). The value of management flexibility - a real option approach to investment evaluation. International Journal of Project Management, 21, 243-250.doi:10.1016/S0263-7863(02)00025-X
- Black, F. & Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. The Journal of Political Economy, 81(3), 637-654.doi:10.1086/260062
- Merton, R.C., Scholes, M.S., & Gladstein, M.L. (1982). The Returns and Risks of Alternative Put-Option Portfolio Investment Strategies. Journal of Business,55(1), 1-55. doi:10.1086/296153
- Cox, J.C. & Ross, S.A. (1976). The Valuation of Options for Alternative Stochastic Processes. Journal of Financial Economics, 3, 145-166. doi:10.1016/0304-405X(76)90023-4
- Trigeorgis, L. (1993). Real Options and Interactions with Financial Flexibility. Financial Management, 22(3), 202-224.
- Amram, M. & Kulatilaka, N. (1999). Disciplined decisions: aligning strategy with the financial markets. Harvard Business Review, 77(1), 95-104.
- Boyabatl?, O. and L. B. Toktay. (2004). Operational hedging: a review with discussion. Working Paper. INSEAD.
- Weiss, D. & Maher, M.W. (2009). Operational hedging against adverse circumstances.Journal of Operations Ma- nagement, 27, 362-373. doi:10.1016/j.jom.2008.10.003
- Jack, E. P. andRaturi, A. (2002).Sources of volume flexibility and their impact on performance.Journal of Operations Management, 20, 519-548. doi:10.1016/S0272-6963(01)00079-1
- da Silveira, G. (2006). Effects of simplicity and discipli- ne on operational flexibility: An empirical reexamination of the rigid flexibility model. Journal of Operations Management, 24, 932-947. doi:10.1016/j.jom.2005.11.004
- Sawhney, R. (2006). Interplay between uncertainty and flexibility across the value-chain: Towards a transformation model of manufacturing flexibility. Journal of Operations Management, 24, 476-493. doi:10.1016/j.jom.2005.11.008
- Pagell, M. and Krause, D.R. (2004). Re-exploring the relationship between flexibility and the external environment. Journal of Operations Management, 21, 629-649.doi:10.1016/j.jom.2003.11.002
- Swamidass, P.M., and Newell, W.T. (1987). Manufacturing strategy, environmental uncertainty and performance: a path analytic model. Management Science, 33, 509-524. doi:10.1287/mnsc.33.4.509
- Duray, R., Ward, P., Milligan, G., & Berry, W. (2000). Approaches to mass customization: configurations and empirical validation. Journal of Operations Management, 18, 605-625.doi:10.1016/S0272-6963(00)00043-7