Real-option valuation of research and development investments. Implications for performance measurement

Managerial Auditing Journal

Volumn 20, Issue 1, 2005, Pages 55-72

  Herath, Hemantha S B ^a   Bremser, Wayne G ^b  

^a BROCK UNIVERSITY   (Canada)

^b VILLANOVA UNIVERSITY   (United States)

Author keywords

Income; Performance measures; Research and development

Indexed keywords

EID: 19944416911     PISSN: 02686902     EISSN: None     Source Type: Journal    
DOI: 10.1108/02686900510570704     Document Type: Article

References (54)

1. Angelis, D.I. (2000), "Capturing the option value of R&D", Research Technology Management, Vol. 43 No. 4, pp. 31-4.
2. Benninga, S. and Tolkowsky, E. (2002), "Real options: An introduction and application to R&D valuation", The Engineering Economist, Vol. 47 No. 2, pp. 151-68.
3. Blake, G. (1999), "Ten 'biggest' problems technology leaders face", Research Technology Management, Vol. 42 No. 6, pp. 13-14.
4. Boer, F.P. (2000), "Valuation of technology using 'real options'", Research Technology Management, Vol. 43 No. 4, pp. 20-30.
5. Boer, F.P. (2002a), The Real Options Solution: Finding Total Value in a High-Risk World, John Wiley & Sons, New York, NY.
6. Boer, F.P. (2002b), "Real options: The IT investment risk-buster", Financial Management, Vol. 9, July, pp. 64-6.
7. Boer, F.P. (2002c), "Financial management of R&D", Research Technology Management, Vol. 45 No. 4, pp. 23-9.
8. Booth, R. (1999), "Avoiding pitfalls in investment appraisal" Management Accounting, November, pp. 22-3.
9. Brabazon, T. (1999), "Real options: Valuing flexibility in capital investment decisions", Accountancy Ireland, Vol. 31 No. 6, pp. 16-18.
10. Bremser, W.G. and Barsky, N. (2004), "Utilizing the balanced scorecard for R&D performance measurement", R&D Management, Vol. 34, pp. 229-38.
11. Brown, M.G. and Svenson, R.A. (1998), "Measuring R&D productivity", Research Technology Management, Vol. 41 No. 6, pp. 30-5.
12. Busby, J. and Pitts, C. (1997), "Real options in practice: An exploratory survey of how decision makers in industry think about flexibility", Management Accounting Research, Vol. 8 No. 2, pp. 169-86.
13. Chan, S.H., Martin, J. and Kensinger, J. (1990), "Corporate research and development expenditures and share value", Journal of Financial Economics, Vol. 26, August, pp. 255-77.
14. Chiesa, V., Coughlan, P. and Voss, C.A. (1996), "Development of a technical innovation audit", Journal of Product Innovation Management, Vol. 13 No. 2, pp. 105-36.
15. Copeland, T. and Antikarov, V. (2001), Real Options: A Practitioner's Guide, Texere Publishing Limited, New York, NY.
16. Copeland, T.E. and Keenan, P.T. (1998), "Making real options real", The McKinsey Quarterly, Vol. 3, pp. 128-41.
17. Cortazar, G. and Schwartz, E.S. (1993), "A compound option model of production and intermediate inventories", Journal of Business, Vol. 66 No. 4, pp. 517-40.
18. Damodaran, A. (2000), "The promise of real options", Journal of Applied Corporate Finance, Vol. 13 No. 2, pp. 29-44.
19. Dillion, R.D. and Owers, J.E. (1997), "EVA as a financial metric: attributes, utilization, and relationship to NPV", Financial Practice and Education, Vol. 7, pp. 32-40.
20. Doukas, J. and Switzer, L. (1992), "The stock market's valuation of R&D spending and market concentration", Journal of Economics and Business, Vol. 44 No. 2, pp. 95-114.
21. Faulkner, T.W. (1996), "Applying 'options thinking' to R&D valuation", Research - Technology Management, Vol. 39 No. 3, pp. 50-6.
22. Foster, R.N., Linden, L.H., Whitely, R.L. and Kantrow, A.M. (1985), "Improving the return on R&D", Research - Technology Management, Vol. 28 No. 1, pp. 12-17.
23. Griffin, A. and Page, A.L. (1993), "An interim report on measuring product development successes and failure", Journal of Product Innovation Management, Vol. 10, pp. 291-308.
24. Grinyer, J.R. and Walker, M. (1990), "Deprival value accounting rates of return", Economics Journal, Vol. 100 No. 3, pp. 918-22.
25. Hatfield, G.R. (2002), "R&D in an EVA world", Research - Technology Management, Vol. 45 No. 1, pp. 41-7.
26. Herath, H.S.B. and Park, C.S. (1999), "Economic analysis of R&D projects: An options approach", The Engineering Economist, Vol. 44 No. 1, pp. 1-35.
27. Herath, H.S.B. and Park, C.S. (2002), "Multi-stage capital investment opportunities as compound real options", The Engineering Economist, Vol. 47, pp. 1-27.
28. Kaplan, R.S. and Norton, D.P. (1996a), "Using the balanced scorecard as a strategic management system", Harvard Business Review, Vol. 74 No. 1, pp. 75-85.
29. Kaplan, R.S. and Norton, D.P. (1996b), The Balanced Scorecard, Harvard Business School Press, Boston, MA.
30. Kaplan, R.S. and Norton, D.P. (2001a), The Strategy Focused Organization, Harvard Business School Press, Boston, MA.
31. Kaplan, R.S. and Norton, D.P. (2001b), "Transforming the balanced scorecard from performance measurement to strategic management: Part I", Accounting Horizons, Vol. 15 No. 1, pp. 87-104.
32. Kaplan, R.S. and Norton, D.P. (2001c), "Transforming the balanced scorecard from performance measurement to strategic management: Part II", Accounting Horizons, Vol. 15 No. 2, pp. 147-60.
33. Kerssens-van Drongelen, I.C. and Bilderbeek, J. (1999), "R&D performance measurement: More than choosing a set of metrics", R&D Management, Vol. 29 No. 1, pp. 35-46.
34. Kerssens-van Drongelen, I.C., Nixon, B. and Pearson, A. (2000), " Performance measurement in industrial R&D", International Journal of Management Reviews, Vol. 2, pp. 111-43.
35. Luehrman, T.A. (1998), "Strategy as a portfolio of real options", Harvard Business Review, Vol. 76, September-October, pp. 89-99.
36. Lundholm, R.L. and O'Keefe, T. (2001), "Reconciling value estimates from the discounted cash flow model and the residual income model", Contemporary Accounting Research, Vol. 18, pp. 311-35.
37. Merchant, K.A. (1998), Modern Management Central Systems: Text and Cases, Prentice-Hall, Upper Saddle River, NJ.
38. Moser, M.R. (1985), "Measuring performance in R&D settings", Research and Technology Management, Vol. 28 No. 5, pp. 31-4.
39. Myers, S.C. (1977), "Determinants of corporate borrowing", Journal of Financial Economics, Vol. 5 No. 2, pp. 147-76.
40. Myers, S.C. (1984), "Financial theory and financial strategy", Interface, Vol. 14 No. 1, pp. 126-37.
41. Myers, S.C. (1996), "Fischer Black's contribution to corporate finance", Financial Management, Vol. 25, Winter, pp. 95-103.
42. Pearson, A.W., Nixon, W.A. and Kerssens-van Drongelen, I.C. (2000), "R&D as a business: What are the implications for performance measurement?", R&D Management, Vol. 30, October, pp. 355-66.
43. Ramezani, C.A. (2003), "Real options, corporate performance and shareholder value creation", working paper, California Polytechnic State University, San Luis Obispo, CA.
44. Reichelstein, S. (1997), "Investment decisions and managerial performance evaluation", Review of Accounting Studies, Vol. 2 No. 2, pp. 157-80.
45. Schumann, P., Ransley, D. and Prestwood, D. (1995), "Measuring R&D performance", Research Technology Management, Vol. 38 No. 3, pp. 45-54.
46. Shrieves, R.E. and Wachowicz, J.M. Jr (2001), "Free cash flow (FCF), economic value added (EVA™), and net present value (NPV): a reconciliation of variations of discounted-cash-flow (DCF) valuation", The Engineering Economist, Vol. 46, pp. 33-52.
47. Stark, A.W. (2000), "Real options, (dis)investment decision-making and accounting", Journal of Business Finance and Accounting, Vol. 27 No. 3/4, pp. 313-31.
48. Treynor, J.L. and Black, F. (1976), "Corporate investment decisions", in Myers, S.C. (Ed.), Modern Developments in Financial Management, Praeger, New York, NY, pp. 310-27.
49. Werner, B.M. and Souder, W.E. (1997), "Measuring R&D performance: State-of-the- art", Research - Technology Management, Vol. 40, March-April, pp. 34-42.
50. Woolridge, J.R. and Snow, C.W. (1992), "Stock market reaction to strategic investment decisions", Strategic Management Journal, Vol. 11, pp. 353-63.
51. Boer, F.P. (1998), "Traps, pitfalls and snares in the valuation technology", Research Technology - Management, Vol. 41 No. 5, pp. 45-50.
52. Davila, A. (2000), "An empirical study on the drivers of management control systems' design in new product development", Accounting, Organizations and Society, Vol. 25, pp. 383-409.
53. Kellogg, D. and Charnes, J.M. (2000), "Real-options valuation for a biotechnology company", Financial Analysts Journal, Vol. 56 No. 3, p. 76.
54. Stewart, G.B. (1991), The Quest for Value: The EVA Management Guide, HarperCollins Publishers, Inc., New York, NY.