Reflections on Real Options Valuation Approach to Sustainable Capital Budgeting Practice

S. Aro-Gordon (), M. Al-Salmi, G. Chinnasamy () and G. Soundararajan ()
Additional contact information
S. Aro-Gordon: Muscat College
M. Al-Salmi: Haya Diam
G. Chinnasamy: CMS Business School
G. Soundararajan: Muscat College

A chapter in Sustainable Education and Development – Sustainable Industrialization and Innovation, 2023, pp 358-374 from Springer

Abstract: Abstract Purpose: Business exists to create value for society. One factor that is often overlooked in business valuation is the real options value that a project may have. This paper aims to revisit the real options valuation approach as an advanced capital budgeting technique, based on new data obtained between December 2020 and May 2022 and to reflect on how the results could be integrated with previous research. Design/Methodology/Approach: Structured questionnaire was distributed to managers working mainly in the large manufacturing firms in the emerging market of Oman. Two hundred and two managers responded to the survey. A panel of experts and Cronbach’s Alpha coefficient confirmed the instrument’s validity and reliability. The perspectives gained from two virtual focus group capital budgeting expert discussions held in November 2020 and May 2022 were integrated with the survey results. Findings: The results show that the ROV method is yet to gain traction as a veritable capital investment appraisal technique. A significant challenge against using ROV revolves around top management's willingness to explore its benefits, its perceived complexity, the minimal level of understanding of how it could be used and the depth of data-driven corporate culture. The nature of the industry and the firm’s size are also influential factors. Research Limitations/Implications: A notable limitation of this study is that choice of the population may lead to a biased result toward large firms. Practical Implications: The paper reflects on opportunities for managers to improve investment decision-making quality in an increasingly unpredictable global business environment. Real options offer robustness and flexibility to deal with capital investment uncertainty. Given the heightened risks and uncertainties in the global business environment, managers need to start using the real options reasoning (ROR) strategy. Adequate training and capacity building at the highest level of management is imperative. Originality/Value: The paper is probably the first real options study in Oman and thus joins the flow of recent country-specific real options empirical research, notably from the Nordic economies and Nigeria. The paper’s main argument is that integrating ROR into traditional capital budgeting is imperative for achieving the steady flow of a future stream of shared well-being. The paper adds to the literature on the relatively more advanced capital budgeting approach.

Keywords: Black-Scholes-Merton; Capital-budgeting; Flexibility; Investment; Real-options (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-25998-2_27

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DOI: 10.1007/978-3-031-25998-2_27

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