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Information Revelation, Incentives, and the Value of a Real Option

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  • Brian Mittendorf

    (School of Management, Yale University, New Haven, Connecticut 06520-8200)

Abstract

The real options approach to capital budgeting focuses on valuing benefits of project flexibility. This paper presents an incentive consideration in such valuation. Operating flexibility not only allows a firm to change course in response to new information, but also allows interested observers to make inferences based on the change in course (or lack thereof). Such information conveyance through refined operating choices can alter observers' incentives. As a result, an option to delay may prove valuable because it allows a firm to prolong informational advantages.

Suggested Citation

  • Brian Mittendorf, 2004. "Information Revelation, Incentives, and the Value of a Real Option," Management Science, INFORMS, vol. 50(12), pages 1638-1645, December.
    • Handle: RePEc:inm:ormnsc:v:50:y:2004:i:12:p:1638-1645
    DOI: 10.1287/mnsc.1040.0260
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    References listed on IDEAS

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    Cited by:

    1. Dirk Sliwka, 2007. "Managerial Turnover and Strategic Change," Management Science, INFORMS, vol. 53(11), pages 1675-1687, November.
    2. Meißner, Fabian & Schneider, Georg & Sureth, Caren, 2013. "The impact of corporate taxes and flexibility on entrepreneurial decisions with moral hazard and simultaneous firm and personal level taxation," arqus Discussion Papers in Quantitative Tax Research 141, arqus - Arbeitskreis Quantitative Steuerlehre.
    3. Delaney, Laura & Thijssen, Jacco J.J., 2015. "The impact of voluntary disclosure on a firm’s investment policy," European Journal of Operational Research, Elsevier, vol. 242(1), pages 232-242.
    4. Trigeorgis, Lenos & Tsekrekos, Andrianos E., 2018. "Real Options in Operations Research: A Review," European Journal of Operational Research, Elsevier, vol. 270(1), pages 1-24.
    5. Puhr, Harald & Müllner, Jakob, 2022. "Foreign to all but fluent in many: The effect of multinationality on shock resilience," Journal of World Business, Elsevier, vol. 57(6).

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