Valuing Joint Ventures Using Real Options
AbstractAs the valuation of strategic measures becomes increasingly important, relatively few articles have discussed the valuation methods pertained for joint ventures. This paper shows that real options contribute to a better valuation of joint venture projects through superior reflection of the value drivers compared to traditional valuation methodology. Particularly, the strategic value of a joint venture and the value of flexibility that stems from a less than full commitment can be determined using options valuation. Besides reviewing the basics of real options, the paper discusses the key levers of joint ventures and shows the power of real options in the valuation process. We apply four option types (option to defer, option to expand/acquisition option, option to innovate, and option to abandon) to an imaginary joint venture example and show how to use the Black/Scholes and binomial valuation techniques to value these options. Of the four option types, particularly the option to innovate is important, as it allows to reflect the strategic value of a joint venture generating future business opportunities. Despite its advantages, this valuation methodology also has some drawbacks that are discussed in the concluding section.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0503030.
Length: 32 pages
Date of creation: 31 Mar 2005
Date of revision:
Note: Type of Document - pdf; pages: 32. Working Paper Nr. 7, ESCP- EAP Europäische Wirtschaftshochschule Berlin, September 2004.
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Joint ventures; real options; option valuation; Black/Scholes model; binomial option valuation;
Find related papers by JEL classification:
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-16 (All new papers)
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