Pub Date : 2026-01-01DOI: 10.1016/j.jeconbus.2025.106271
Rudra P. Pradhan , SMRK Samarakoon , SMNN Sarathkumara
This study delves into gender-related disclosures within annual reports of listed non-financial Indian companies from 2007 to 2022. It examines the determinants of these disclosures, their impact on firm value, and their subsequent influence on performance, based on an analysis of 9210 firm-year observations. Key findings reveal that intrinsic firm attributes, including size, age, and board composition, significantly shape gender-centric narratives. A positive association emerges between gender-inclusive language—particularly that which highlights female identities—and firm value. In contrast, male-dominated narratives tend to diminish firm value. Firms that emphasize gender balance, rather than adopting a male-centric tone, exhibit stronger performance outcomes.
{"title":"Gender representation in Indian corporate reports: A textual analytics approach","authors":"Rudra P. Pradhan , SMRK Samarakoon , SMNN Sarathkumara","doi":"10.1016/j.jeconbus.2025.106271","DOIUrl":"10.1016/j.jeconbus.2025.106271","url":null,"abstract":"<div><div>This study delves into gender-related disclosures within annual reports of listed non-financial Indian companies from 2007 to 2022. It examines the determinants of these disclosures, their impact on firm value, and their subsequent influence on performance, based on an analysis of 9210 firm-year observations. Key findings reveal that intrinsic firm attributes, including size, age, and board composition, significantly shape gender-centric narratives. A positive association emerges between gender-inclusive language—particularly that which highlights female identities—and firm value. In contrast, male-dominated narratives tend to diminish firm value. Firms that emphasize gender balance, rather than adopting a male-centric tone, exhibit stronger performance outcomes.</div></div>","PeriodicalId":47522,"journal":{"name":"JOURNAL OF ECONOMICS AND BUSINESS","volume":"138 ","pages":"Article 106271"},"PeriodicalIF":3.4,"publicationDate":"2026-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146116597","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2026-01-01DOI: 10.1016/j.jeconbus.2025.106260
Ana Abras , Bennett Bullock , Joyce Maia , Bruno de Paula Rocha
Banking deserts are localities that lack the physical presence of financial intermediaries. Our study sheds new light on the characteristics of banking deserts in Brazil. We apply machine learning techniques and a classification model to uncover the bank’s strategy of offering products in different local markets. Our results suggest that banks employ a product differentiation strategy, offering a small-scale infrastructure of service posts and ATMs in less developed areas. In areas with higher profitability prospects, banks use a physical network of branches. Among the features most predictive of branch presence and service post markets are population density, educational levels, job formality, GDP per capita, and local measures of infrastructure.
{"title":"Lakes and deserts: Understanding bank presence in Brazil","authors":"Ana Abras , Bennett Bullock , Joyce Maia , Bruno de Paula Rocha","doi":"10.1016/j.jeconbus.2025.106260","DOIUrl":"10.1016/j.jeconbus.2025.106260","url":null,"abstract":"<div><div>Banking deserts are localities that lack the physical presence of financial intermediaries. Our study sheds new light on the characteristics of banking deserts in Brazil. We apply machine learning techniques and a classification model to uncover the bank’s strategy of offering products in different local markets. Our results suggest that banks employ a product differentiation strategy, offering a small-scale infrastructure of service posts and ATMs in less developed areas. In areas with higher profitability prospects, banks use a physical network of branches. Among the features most predictive of branch presence and service post markets are population density, educational levels, job formality, GDP per capita, and local measures of infrastructure.</div></div>","PeriodicalId":47522,"journal":{"name":"JOURNAL OF ECONOMICS AND BUSINESS","volume":"138 ","pages":"Article 106260"},"PeriodicalIF":3.4,"publicationDate":"2026-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146116596","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2026-01-01DOI: 10.1016/j.jeconbus.2025.106246
Mayank Gupta
This study empirically investigates the impact of sustainability reporting on the future financial performance of banking firms. Using a panel regression approach, the study examines 381 listed banking firms from 15 major countries. Contrary to the existing notion, the findings assert a negative influence of sustainability disclosures on bank performance. A detailed analysis suggests that environmental and social disclosures drive this negative effect. Furthermore, additional investigations contemplate that several country-specific factors such as economic development, creditor rights, investor protection, and private monitoring by investors significantly moderate the relationship between ESG disclosures and bank performance. The results are robust to various sensitivity checks. To the best of our knowledge, this is the first study that unveils the moderating role of country-specific factors in sustainability reporting and bank performance nexus. These findings have crucial implications for all the stakeholders, who indulge in sustainability monitoring and reporting.
{"title":"Unveiling the impact of sustainability reporting on banking performance: Role of country-specific determinants","authors":"Mayank Gupta","doi":"10.1016/j.jeconbus.2025.106246","DOIUrl":"10.1016/j.jeconbus.2025.106246","url":null,"abstract":"<div><div>This study empirically investigates the impact of sustainability reporting on the future financial performance of banking firms. Using a panel regression approach, the study examines 381 listed banking firms from 15 major countries. Contrary to the existing notion, the findings assert a negative influence of sustainability disclosures on bank performance<span><span><span>. A detailed analysis suggests that environmental and social disclosures drive this negative effect. Furthermore, additional investigations contemplate that several country-specific factors such as economic development, creditor rights, investor protection, and private monitoring by investors significantly moderate the relationship between </span>ESG disclosures and </span>bank performance. The results are robust to various sensitivity checks. To the best of our knowledge, this is the first study that unveils the moderating role of country-specific factors in sustainability reporting and bank performance nexus. These findings have crucial implications for all the stakeholders, who indulge in sustainability monitoring and reporting.</span></div></div>","PeriodicalId":47522,"journal":{"name":"JOURNAL OF ECONOMICS AND BUSINESS","volume":"138 ","pages":"Article 106246"},"PeriodicalIF":3.4,"publicationDate":"2026-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146116598","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2026-01-01DOI: 10.1016/j.jeconbus.2025.106290
Wolfgang Breuer, Simon Haas, Katharina Mersmann
The Chapter 11 process enables bankrupt firms to reorganize their business to return to profitability. This paper critically evaluates the literature on post-bankruptcy performance of U.S. firms that have emerged from Chapter 11. Analyzing 25 studies, we provide a comprehensive overview of the various post-bankruptcy performance metrics, the influencing factors, and the research methodologies. Post-bankruptcy performance varies significantly across firms, with average refiling rates in these studies between 7 % and 39.3 % decreasing over time, financial performance remaining below industry benchmarks, but stock market performance frequently meeting or exceeding market expectations. Key success factors include firm size, leverage re-duction, industry conditions, and investor involvement, while factors such as CEO turnover and bankruptcy duration show mixed effects. Several research gaps remain, particularly regarding corporate governance, the effects of legal reforms, the use of modern analytical techniques such as machine learning, and potential interacting effects.
{"title":"Post-bankruptcy performance: A systematic literature review on the performance of U.S. firms after emerging from Chapter 11 bankruptcy","authors":"Wolfgang Breuer, Simon Haas, Katharina Mersmann","doi":"10.1016/j.jeconbus.2025.106290","DOIUrl":"10.1016/j.jeconbus.2025.106290","url":null,"abstract":"<div><div>The Chapter 11 process enables bankrupt firms to reorganize their business to return to profitability. This paper critically evaluates the literature on post-bankruptcy performance of U.S. firms that have emerged from Chapter 11. Analyzing 25 studies, we provide a comprehensive overview of the various post-bankruptcy performance metrics, the influencing factors, and the research methodologies. Post-bankruptcy performance varies significantly across firms, with average refiling rates in these studies between 7 % and 39.3 % decreasing over time, financial performance remaining below industry benchmarks, but stock market performance frequently meeting or exceeding market expectations. Key success factors include firm size, leverage re-duction, industry conditions, and investor involvement, while factors such as CEO turnover and bankruptcy duration show mixed effects. Several research gaps remain, particularly regarding corporate governance, the effects of legal reforms, the use of modern analytical techniques such as machine learning, and potential interacting effects.</div></div>","PeriodicalId":47522,"journal":{"name":"JOURNAL OF ECONOMICS AND BUSINESS","volume":"138 ","pages":"Article 106290"},"PeriodicalIF":3.4,"publicationDate":"2026-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146116594","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2026-01-01DOI: 10.1016/j.jeconbus.2025.106289
Lin Zhu , Wenjiao Zang
This paper investigates the impact of industrial land reform on corporate innovation input. To establish causality, we utilize China’s industrial land reform as an exogenous shock to land use efficiency. Using a difference-in-differences approach, we find that the reform significantly facilitates corporate innovation input. Mechanism analyses reveal two primary channels driving this effect: an increase in internal capital through higher average yield per acre and a greater willingness to innovate due to intensified market competition. Further tests show that the positive relationship between industrial land reform and corporate innovation input is more pronounced in regions with a government land supervision agency, higher levels of land misallocation, and among non-high-tech firms. Additionally, the reform enhances the quantity, quality, and efficiency of innovation outputs. The main results hold for various tests, including parallel trend tests, alternative measures, robust checks with an alternative regression model, and the exclusion of other policies. Taken together, our findings provide insights into the micro-level effects of market-oriented land reforms and the determinants shaping corporate innovation.
{"title":"The impact of industrial land reform on corporate innovation input: Evidence from a natural experiment in China","authors":"Lin Zhu , Wenjiao Zang","doi":"10.1016/j.jeconbus.2025.106289","DOIUrl":"10.1016/j.jeconbus.2025.106289","url":null,"abstract":"<div><div>This paper investigates the impact of industrial land reform on corporate innovation input. To establish causality, we utilize China’s industrial land reform as an exogenous shock to land use efficiency. Using a difference-in-differences approach, we find that the reform significantly facilitates corporate innovation input. Mechanism analyses reveal two primary channels driving this effect: an increase in internal capital through higher average yield per acre and a greater willingness to innovate due to intensified market competition. Further tests show that the positive relationship between industrial land reform and corporate innovation input is more pronounced in regions with a government land supervision agency, higher levels of land misallocation, and among non-high-tech firms. Additionally, the reform enhances the quantity, quality, and efficiency of innovation outputs. The main results hold for various tests, including parallel trend tests, alternative measures, robust checks with an alternative regression model, and the exclusion of other policies. Taken together, our findings provide insights into the micro-level effects of market-oriented land reforms and the determinants shaping corporate innovation.</div></div>","PeriodicalId":47522,"journal":{"name":"JOURNAL OF ECONOMICS AND BUSINESS","volume":"138 ","pages":"Article 106289"},"PeriodicalIF":3.4,"publicationDate":"2026-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146116595","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.jeconbus.2025.106273
Verena Hagspiel , Kuno J.M. Huisman , Peter M. Kort , Cláudia Nunes , Rita Pimentel
As technological innovations emerge, firms with the capacity to invest in new products must determine the optimal timing for such investments and decide the future of their existing products. Upon deciding to invest in the innovative product, the firm faces a choice: a single rollover, replacing the established product entirely, or a dual rollover, where the firm produces both products temporarily before eventually phasing out the established one. This paper presents a theoretical framework to evaluate the optimal timing and product rollover strategies in response to technological progress.
Technological advancements enhance the quality of the latest available technology over time, implying that later investments yield higher-quality products. This dynamic creates a strategic tradeoff: investing early offers immediate but modest profit gains, while waiting leads to potentially larger payoffs due to the superior quality of later innovations. However, delaying investment means the firm must continue with the established product for a longer period.
Our findings indicate that a highly uncertain economic environment encourages firms to delay discontinuing the established product. In contrast, a more volatile innovative market prompts earlier entry provided the firm maintains some presence in the established market. Furthermore, if initial demand in the innovative market is low, higher product quality becomes essential for product innovation to be viable. We also show that a higher interest rate makes the firm more inclined to choose a single rollover strategy.
{"title":"Technology innovations and product rollover strategies: A real options approach","authors":"Verena Hagspiel , Kuno J.M. Huisman , Peter M. Kort , Cláudia Nunes , Rita Pimentel","doi":"10.1016/j.jeconbus.2025.106273","DOIUrl":"10.1016/j.jeconbus.2025.106273","url":null,"abstract":"<div><div>As technological innovations emerge, firms with the capacity to invest in new products must determine the optimal timing for such investments and decide the future of their existing products. Upon deciding to invest in the innovative product, the firm faces a choice: a single rollover, replacing the established product entirely, or a dual rollover, where the firm produces both products temporarily before eventually phasing out the established one. This paper presents a theoretical framework to evaluate the optimal timing and product rollover strategies in response to technological progress.</div><div>Technological advancements enhance the quality of the latest available technology over time, implying that later investments yield higher-quality products. This dynamic creates a strategic tradeoff: investing early offers immediate but modest profit gains, while waiting leads to potentially larger payoffs due to the superior quality of later innovations. However, delaying investment means the firm must continue with the established product for a longer period.</div><div>Our findings indicate that a highly uncertain economic environment encourages firms to delay discontinuing the established product. In contrast, a more volatile innovative market prompts earlier entry provided the firm maintains some presence in the established market. Furthermore, if initial demand in the innovative market is low, higher product quality becomes essential for product innovation to be viable. We also show that a higher interest rate makes the firm more inclined to choose a single rollover strategy.</div></div>","PeriodicalId":47522,"journal":{"name":"JOURNAL OF ECONOMICS AND BUSINESS","volume":"137 ","pages":"Article 106273"},"PeriodicalIF":3.4,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145584447","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.jeconbus.2025.106275
Massimiliano Marzo
In the present paper we extend the traditional literature on Dynamic Capital Structure initiated by Merton (1974) and Leland (1994) to a Target Zone à la Krugman (1991). The existing literature focuses on the effects caused by several type of restrictions in the bankruptcy state, without focusing on the evolution of the firm’s value in good state. We show that the conditions excluding the explosive root of the differential equation solving debt and equity equation are in practice not sufficient to guarantee stability. The introduction of a Target Zone is in effect able to bound from above the value of the firm. We fully characterize the Target Zone of the firm’s value and fully solve the dynamic system. The model delivers similar results to those obtained under Real Option approach. We extend our result to a mean reverting process leading revenue growth rate: this confirms all the conclusions from trade-off theory, as opposite to the case obtained with a simple arithmetic Brownian motion. The model is flexible enough to allow many further generalization.
{"title":"Target zones on firm’s value","authors":"Massimiliano Marzo","doi":"10.1016/j.jeconbus.2025.106275","DOIUrl":"10.1016/j.jeconbus.2025.106275","url":null,"abstract":"<div><div>In the present paper we extend the traditional literature on Dynamic Capital Structure initiated by Merton (1974) and Leland (1994) to a Target Zone à la Krugman (1991). The existing literature focuses on the effects caused by several type of restrictions in the bankruptcy state, without focusing on the evolution of the firm’s value in good state. We show that the conditions excluding the explosive root of the differential equation solving debt and equity equation are in practice not sufficient to guarantee stability. The introduction of a Target Zone is in effect able to bound from above the value of the firm. We fully characterize the Target Zone of the firm’s value and fully solve the dynamic system. The model delivers similar results to those obtained under Real Option approach. We extend our result to a mean reverting process leading revenue growth rate: this confirms all the conclusions from trade-off theory, as opposite to the case obtained with a simple arithmetic Brownian motion. The model is flexible enough to allow many further generalization.</div></div>","PeriodicalId":47522,"journal":{"name":"JOURNAL OF ECONOMICS AND BUSINESS","volume":"137 ","pages":"Article 106275"},"PeriodicalIF":3.4,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145584452","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.jeconbus.2025.106270
Carlos L. Bastian-Pinto , Luiz G. Bastian , Luiz E. Brandão , Luis Manfredini Hernandez Requejo , Glaucia Fernandes Vasconcelos
Investments in agricultural ventures are subject to significant risks due to market price uncertainty. We propose a strategy for farmers to maximize their financial returns and reduce risk based on their capacity to switch crops annually by taking advantage of each crop’s price volatility. We use the real options approach (ROA) to determine the value and risk of annual crop switches in the Brazilian agricultural sector. Four annual crops are selected (soybeans, cotton, corn, and wheat), and their prices are modeled using a mean-reverting stochastic process. Monte Carlo simulation is applied to estimate the value added by crop switching flexibility over a 10-year planting period considering a typical medium-size farm in Brazil. We only consider market price uncertainty for crop switching decisions and assume that such switching can be exercised at zero cost. Results indicate that the option to switch crops annually adds significant value and reduces producers’ financial risk. A lower price correlation between different crop prices yields a greater effect on the value of the crop switching option. Financial valuation of agricultural activity is significant, particularly if it follows a strategy that farmers can easily manage. Quantifying this strategy using the ROA constitutes hedging for farmers who face price volatility risk. To the best of our knowledge, the association of multiple crop choices to price dynamics using the ROA is a novel approach that will enrich the existing literature.
{"title":"Managing agriculture commodity price uncertainty with crop switching: A real options approach","authors":"Carlos L. Bastian-Pinto , Luiz G. Bastian , Luiz E. Brandão , Luis Manfredini Hernandez Requejo , Glaucia Fernandes Vasconcelos","doi":"10.1016/j.jeconbus.2025.106270","DOIUrl":"10.1016/j.jeconbus.2025.106270","url":null,"abstract":"<div><div>Investments in agricultural ventures are subject to significant risks due to market price uncertainty. We propose a strategy for farmers to maximize their financial returns and reduce risk based on their capacity to switch crops annually by taking advantage of each crop’s price volatility. We use the real options approach (ROA) to determine the value and risk of annual crop switches in the Brazilian agricultural sector. Four annual crops are selected (soybeans, cotton, corn, and wheat), and their prices are modeled using a mean-reverting stochastic process. Monte Carlo simulation is applied to estimate the value added by crop switching flexibility over a 10-year planting period considering a typical medium-size farm in Brazil. We only consider market price uncertainty for crop switching decisions and assume that such switching can be exercised at zero cost. Results indicate that the option to switch crops annually adds significant value and reduces producers’ financial risk. A lower price correlation between different crop prices yields a greater effect on the value of the crop switching option. Financial valuation of agricultural activity is significant, particularly if it follows a strategy that farmers can easily manage. Quantifying this strategy using the ROA constitutes hedging for farmers who face price volatility risk. To the best of our knowledge, the association of multiple crop choices to price dynamics using the ROA is a novel approach that will enrich the existing literature.</div></div>","PeriodicalId":47522,"journal":{"name":"JOURNAL OF ECONOMICS AND BUSINESS","volume":"137 ","pages":"Article 106270"},"PeriodicalIF":3.4,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145584450","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.jeconbus.2025.106277
Marco Antonio Guimarães Dias , Roberto Evelim Penha Borges
Petroleum reserve is defined as the economically recoverable volume given a capital in place. As an economic concept, the reserve volume is determined by the abandonment decision, with the oil price being a key factor. We estimate the oil reserve volume under oil price uncertainty using the real options (RO) approach. We highlight the similarities and differences between this real abandonment option and the financial put. We compare RO results with discounted cash flow (DCF) results from intuitive and quantitative perspectives. DCF uses expected cash flow to report the value and volume of reserves until the economic life of an oilfield ends (abandonment). RO makes the uncertainty explicit, and the ex-post application of the RO abandonment rule implies a greater reserve volume because it considers the value of waiting before exercising the abandonment option. Paradoxically, for reserve reporting, ex-ante DCF is optimistic about the reserve volume compared with the RO, except in case of mature fields. For the expected volume computation with the abandonment option, we introduce Pruned Pascal’s Algorithm to assess the probability of continuing to produce in the binomial tree. This algorithm is more general and can be used in other RO applications. We use the risk-neutral measure to calculate the reserve value and the real probability measure to calculate the expected reserve volume. Because we employ the real/true probability measure, analysis of the effect of volatility on the reserve volume cannot be performed using the usual ceteris paribus approach. The methodology can also be used in other RO applications.
{"title":"Valuing oil reserve volumes under price uncertainty","authors":"Marco Antonio Guimarães Dias , Roberto Evelim Penha Borges","doi":"10.1016/j.jeconbus.2025.106277","DOIUrl":"10.1016/j.jeconbus.2025.106277","url":null,"abstract":"<div><div>Petroleum reserve is defined as the economically recoverable volume given a capital in place. As an economic concept, the reserve volume is determined by the abandonment decision, with the oil price being a key factor. We estimate the oil reserve volume under oil price uncertainty using the real options (RO) approach. We highlight the similarities and differences between this real abandonment option and the financial put. We compare RO results with discounted cash flow (DCF) results from intuitive and quantitative perspectives. DCF uses expected cash flow to report the value and volume of reserves until the economic life of an oilfield ends (abandonment). RO makes the uncertainty explicit, and the <em>ex-post</em> application of the RO abandonment rule implies a greater reserve volume because it considers the value of waiting before exercising the abandonment option. Paradoxically, for reserve reporting, <em>ex-ante</em> DCF is optimistic about the reserve volume compared with the RO, except in case of mature fields. For the expected volume computation with the abandonment option, we introduce <em>Pruned Pascal’s Algorithm</em> to assess the probability of continuing to produce in the binomial tree. This algorithm is more general and can be used in other RO applications. We use the risk-neutral measure to calculate the reserve value and the real probability measure to calculate the expected reserve volume. Because we employ the real/true probability measure, analysis of the effect of volatility on the reserve volume cannot be performed using the usual <em>ceteris paribus</em> approach. The methodology can also be used in other RO applications.</div></div>","PeriodicalId":47522,"journal":{"name":"JOURNAL OF ECONOMICS AND BUSINESS","volume":"137 ","pages":"Article 106277"},"PeriodicalIF":3.4,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145584451","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.jeconbus.2025.106276
Arkadiy V. Sakhartov
A key benefit of real options is that they provide a firm with an additional return, above the expected discounted net cash flow that the firm would receive from the indiscriminate use of its resources. Some research on strategic resource allocation informally speculated that, along with providing a firm with an extra return, real options can help that firm reduce its risk. The empirical corroboration of the availability of such dual benefits for firms has been limited because that idea was never carefully developed theoretically. This study develops formal models that demonstrate how four popular real options affect a firm’s risk. With a few qualifications, a firm’s risk is shown to be increased by real options. In addition to explaining this more-general result and the exceptions leading to risk-reduction, this study develops a systematic account of how risk associated with real options derives from their determinants.
{"title":"Real options: Added return versus added risk","authors":"Arkadiy V. Sakhartov","doi":"10.1016/j.jeconbus.2025.106276","DOIUrl":"10.1016/j.jeconbus.2025.106276","url":null,"abstract":"<div><div>A key benefit of real options is that they provide a firm with an additional return, above the expected discounted net cash flow that the firm would receive from the indiscriminate use of its resources. Some research on strategic resource allocation informally speculated that, along with providing a firm with an extra return, real options can help that firm reduce its risk. The empirical corroboration of the availability of such dual benefits for firms has been limited because that idea was never carefully developed theoretically. This study develops formal models that demonstrate how four popular real options affect a firm’s risk. With a few qualifications, a firm’s risk is shown to be increased by real options. In addition to explaining this more-general result and the exceptions leading to risk-reduction, this study develops a systematic account of how risk associated with real options derives from their determinants.</div></div>","PeriodicalId":47522,"journal":{"name":"JOURNAL OF ECONOMICS AND BUSINESS","volume":"137 ","pages":"Article 106276"},"PeriodicalIF":3.4,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145584446","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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