Real Options and Managerial Incentives to Invest / Real Options and Managerial Incentives to Invest

Studyboard of Market and Management Anthropology, Economics, Mathematics-Economics, and Environmenta, Odense
Teaching activity id: 9111401.
Teaching language: English.ECTS / weighting: 10 ECTS / 0.167 full-time equivalent.
Examination language: English.
Exam activity id: 9111402.Approved: 03-10-17.
Period: Spring 2018.
Grading: Internal grading.
Assessment: 7-point scale.
Offered in: Odense.
Subject director:
Professor Christian Riis Flor, Department of Business and Economics.

Prerequisites:
Bachelor of Science in Economics, Mathematics and Economics or Business Administration (with finance courses corresponding to a BSc in Economics).

It is assumed that the student is familiar with basic real options analysis as well as agency problems within corporations. The necessary skills may be obtained in the graduate course:

”Advanced Corporate Finance” (course no. 9345301)

The course also applies basic techniques known from microeconomics, elementary mathematics and statistics. The student should be sufficiently knowledgeable about finance to apply these topics in context of financial decision-making.

The necessary skills may be obtained in the bachelors' courses:

”Mikroøkonomi” (course no. 9115502),
"Finansiering, investering og virksomhedsstrategi" (course no. 9161001),
"Matematik" (course no. 9105701), and
"Statistik" (course no. 9116001) 


Purpose:
This course provides a thorough understanding of investment behaviour within large corporations. The managerial incentives to invest as well as the mechanisms that can be applied to align a manager’s interests with shareholders’ interests are well established. However, when the decision to invest in—and the exercise of—real options are delegated to a self-interested manager, several challenges emerge, and the basic corporate finance insights do not necessarily apply.

The course provides an in-depth treatment of the valuation of and investment activity in real options in this context. This subject matter has vast applications for corporate finance, valuation, accounting, and management.

The course treats an active research field, and as such, we will rely on a textbook as well as research articles. We will establish the basic model in context of known results from agency theory and real option valuation.


Content - Key areas:
  • Real options analysis in a discrete-time setting
  • Managerial incentives to invest
  • Mechanism design, principal-agent models, and agency theory
  • Performance measurement


Goals description (SOLO taxonomy):
To fulfil the purposes of the course the student must be able to:

Demonstrate knowledge about the course’s focus areas enabling the student to:

  • Explain challenges related to managerial decision making regrading investment within firms
  • Explain and reflect on principal-agent issues related to real options
  • Describe and comment on the appropriateness of various theoretical methodologies for the analysis of investment incentives
  • Explain differences and similarities between various control mechanisms such as performance measures and capital rationing

Demonstrate skills, such that the student is able to:

  • Analyse the implications of managerial discretion in relation to real options
  • Analyse the impact of asymmetric information related to managerial discretion
  • Solve specific theoretical models by means of simple optimization methods
  • Compare and analyse conflicting results in the literature

Demonstrate competences, such that the student is able to:

  • Identify conflicting results in the literature
  • Apply the theory to derive optimal mechanisms that minimize agency costs
  • Discuss the tractability and relevance of specific models
  • Independently apply the basic model of real options and managerial investment decisions to identify applications outside the scope of corporate finance.
 

Literature:
Gunther Friedl: “Real Options and Investment Incentives”; Springer 2007
+ Articles


Time of classes:
Summer 2018                

Scheduled classes:
36 hours of lectures and class work spread out over two weeks within the period from late June until mid-July. The precise period of lecturing is announced early June.

Form of instruction:
Lectures and exercises in classes. Student participation is encouraged throughout the course.

The students' workload is expected to be distributed as follows:
Lectures - 36 hours
Preparation, lectures - 144 hours
Take home exam - 15 hours
Term paper – 75 hours
Total 270 hours

Time of examination:
Summer 2018 with re-examination in August 2018
The form of the re-examination may be subject to change. The students are informed about the change in format after the students have signed in the re-examination.


Examination conditions:
None

Form of examination for the certificate:
Portfolio exam consisting of two parts. One grade is given.
  • a written take-home exam and
  • a term paper.


Supplemental information for the form of examination:
1. The take home exam takes place during the period of lecturing.
Duration: Announced by the instructor.
Location: Home assignment.
Internet Access: Necessary.
Hand Out: Course page in Blackboard.
Hand In: Via SDUassignment in the course page in Blackboard.
Extent: Decided by the instructor.
Exam Aids: All exam aids allowed.

2. Term paper
At the end of the last lecture, a term paper exam is distributed.
Duration: 2 weeks. Date for submission will appear from the examination plan.
Location: Home assignment.
Internet Access: Necessary.
Hand Out: Course page in Blackboard.
Hand In: Via SDUassignment in the course page in Blackboard.
Extent: Decided by the instructor.
Exam Aids: All exam aids allowed.
 
Participation in both parts is necessary to receive a final grade.


Comments:
None

Programmes:
cand.oecon. Finance and Economics
Spring Semester, elective subject. Offered in: Odense
cand.merc. Accounting and Finance
Spring Semester, elective subject. Offered in: Odense
cand.scient.oecon. (Matematik-Økonomi)
Spring Semester, elective subject. Offered in: Odense