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Exploring the Usefulness of Real Options Theory for Foreign Affiliate Divestments: Real Abandonment Options’ Applications

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  • Andrejs Čirjevskis

    (Faculty of Business and Economics, RISEBA University of Applied Sciences, Meza Street 3, LV-1048 Riga, Latvia)

Abstract

Scholars propose that future research on real options theory should shift attention away from option buying during the first investment stage and toward option execution after investment. Researchers maintain that it would be interesting to explore the circumstances under which investors decide to withdraw their investments, thereby exercising the option to abandon their investments. The present research seeks to fill the gap in the literature and investigate the applicability of real options theory when an organization enhances sustainability policies while focusing on disciplined capital allocation through exit strategies. With case study data on Natura &Co’s divestment strategy for the Body Shop in November 2023, a real options analysis revealed the method’s practical advantages and disadvantages. This paper investigates real options theory in the context of the divestments of foreign affiliates, providing unique viewpoints and enhancing the theory beyond previous knowledge while also increasing our understanding of the divestiture phenomenon. This study concludes with a review of this paper’s theoretical contributions to real options theory, the managerial and practical/social implications of real options applications in general, and the valuation methods of abandonment options in particular, shedding light on the potential of future research.

Suggested Citation

  • Andrejs Čirjevskis, 2024. "Exploring the Usefulness of Real Options Theory for Foreign Affiliate Divestments: Real Abandonment Options’ Applications," JRFM, MDPI, vol. 17(10), pages 1-17, September.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:10:p:438-:d:1489130
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    References listed on IDEAS

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    3. Tony W. Tong & Yong Li, 2011. "Real Options and Investment Mode: Evidence from Corporate Venture Capital and Acquisition," Organization Science, INFORMS, vol. 22(3), pages 659-674, June.
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    5. Nicoleta Vintila, 2007. "Real Options in Capital Budgeting. Pricing the Option to Delay and the Option to Abandon a Project," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 7(7(512)), pages 47-58, July.
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