IDEAS home Printed from https://ideas.repec.org/a/bla/bstrat/v20y2011i1p55-70.html
   My bibliography  Save this article

The use of real options valuation methodology in enhancing the understanding of the impact of climate change on companies

Author

Listed:
  • Emily Tyler
  • Richard Chivaka

Abstract

Climate change has in recent years gathered traction on the business, political and social agenda. From the business perspective, research has shown that climate change impacts on company value are uncertain, significant and strategically important. The challenge therefore is for the business community to apply financial valuation models that support the incorporation of the climate change impacts in strategic planning. However, the commonly used discounted cash flow techniques in capital budgeting are seen as failing to address the high levels of uncertainties inherent in climate change impacts. Real options thinking has been touted as having the potential to enhance understanding of these impacts via its direct handling of uncertainty, although not much research has been done to demonstrate this. Using an illustrative case study, this research presents an argument for introducing the real options approach, a new method for valuing options of future strategic action by companies in a setting that exhibits climate change impacts. The objective of this research is to contribute to the literature on strategic tools for addressing climate change and ultimately offer some management insights that can narrow the gap between finance theory and business practice. Copyright © 2009 John Wiley & Sons, Ltd and ERP Environment.

Suggested Citation

  • Emily Tyler & Richard Chivaka, 2011. "The use of real options valuation methodology in enhancing the understanding of the impact of climate change on companies," Business Strategy and the Environment, Wiley Blackwell, vol. 20(1), pages 55-70, January.
    • Handle: RePEc:bla:bstrat:v:20:y:2011:i:1:p:55-70
    DOI: 10.1002/bse.668
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/bse.668
    Download Restriction: no
    File URL: https://libkey.io/10.1002/bse.668?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Michael Toman, 1998. "Research Frontiers in the Economics of Climate Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 11(3), pages 603-621, April.
    2. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    3. Kolk, Ans & Pinkse, Jonatan, 2004. "Market Strategies for Climate Change," European Management Journal, Elsevier, vol. 22(3), pages 304-314, June.
    4. repec:wbk:wboper:13408 is not listed on IDEAS
    5. repec:wbk:wboper:13412 is not listed on IDEAS
    6. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
    7. Karan Capoor & Philippe Ambrosi, "undated". "State and Trends of the Carbon Market 2006 : A Focus on Africa," World Bank Publications - Reports 13413, The World Bank Group.
    8. Sir Nicholas Stern, 2006. "What is the Economics of Climate Change?," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 7(2), pages 1-10, April.
    9. Karan Capoor & Philippe Ambrosi, "undated". "State and Trends of the Carbon Market 2006," World Bank Publications - Reports 13409, The World Bank Group.
    10. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    11. Geoffrey Heal & Bengt Kriström, 2002. "Uncertainty and Climate Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(1), pages 3-39, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jorge Tarifa-Fernández & Ana María Sánchez-Pérez & Salvador Cruz-Rambaud, 2019. "Internet of Things and Their Coming Perspectives: A Real Options Approach," Sustainability, MDPI, vol. 11(11), pages 1-15, June.
    2. Mirza, Nawazish & Umar, Muhammad & Horobet, Alexandra & Boubaker, Sabri, 2024. "Effects of climate change and technological capex on credit risk cycles in the European Union," Technological Forecasting and Social Change, Elsevier, vol. 204(C).
    3. Konstantinos Evangelinos & Ioannis Nikolaou & Walter Leal Filho, 2015. "The Effects of Climate Change Policy on the Business Community: A Corporate Environmental Accounting Perspective," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 22(5), pages 257-270, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sergio Zúñiga, 1999. "Modelos de Tasas de Interés en Chile: Una Revisión," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 36(108), pages 875-893.
    2. René Garcia & Richard Luger & Eric Renault, 2000. "Asymmetric Smiles, Leverage Effects and Structural Parameters," Working Papers 2000-57, Center for Research in Economics and Statistics.
    3. Rui Vilela Mendes & M. J. Oliveira, 2006. "A data-reconstructed fractional volatility model," Papers math/0602013, arXiv.org, revised Jun 2007.
    4. Panagiotidis, Theodore & Printzis, Panagiotis, 2020. "What is the investment loss due to uncertainty?," Global Finance Journal, Elsevier, vol. 45(C).
    5. Rodriguez, Ricardo J., 2002. "Lognormal option pricing for arbitrary underlying assets: a synthesis," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(3), pages 577-586.
    6. Ait-Sahalia, Yacine & Lo, Andrew W., 2000. "Nonparametric risk management and implied risk aversion," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 9-51.
    7. Zura Kakushadze, 2016. "Volatility Smile as Relativistic Effect," Papers 1610.02456, arXiv.org, revised Feb 2017.
    8. Coggins, Jay S. & Ramezani, Cyrus A., 1998. "An Arbitrage-Free Approach to Quasi-Option Value," Journal of Environmental Economics and Management, Elsevier, vol. 35(2), pages 103-125, March.
    9. Ghysels, E. & Harvey, A. & Renault, E., 1995. "Stochastic Volatility," Papers 95.400, Toulouse - GREMAQ.
    10. Carpenter, Jennifer N., 1998. "The exercise and valuation of executive stock options," Journal of Financial Economics, Elsevier, vol. 48(2), pages 127-158, May.
    11. Jianqing Fan, 2004. "A selective overview of nonparametric methods in financial econometrics," Papers math/0411034, arXiv.org.
    12. Panagiotidis, Theodore & Printzis, Panagiotis, 2021. "Investment and uncertainty: Are large firms different from small ones?," Journal of Economic Behavior & Organization, Elsevier, vol. 184(C), pages 302-317.
    13. Marcos Escobar & Christoph Gschnaidtner, 2018. "A multivariate stochastic volatility model with applications in the foreign exchange market," Review of Derivatives Research, Springer, vol. 21(1), pages 1-43, April.
    14. Dan W. French & Edwin D. Maberly, 1992. "Early Exercise Of American Index Options," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 15(2), pages 127-137, June.
    15. Ait-Sahalia, Yacine & Duarte, Jefferson, 2003. "Nonparametric option pricing under shape restrictions," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 9-47.
    16. Li, Chenxu & Ye, Yongxin, 2019. "Pricing and Exercising American Options: an Asymptotic Expansion Approach," Journal of Economic Dynamics and Control, Elsevier, vol. 107(C), pages 1-1.
    17. Ben Boukai, 2021. "On the RND under Heston's stochastic volatility model," Papers 2101.03626, arXiv.org.
    18. Chen, Andrew H., 2002. "A new perspective on infrastructure financing in Asia," Pacific-Basin Finance Journal, Elsevier, vol. 10(3), pages 227-242, June.
    19. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:bstrat:v:20:y:2011:i:1:p:55-70. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://onlinelibrary.wiley.com/journal/10.1002/(ISSN)1099-0836 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.