Article2006

Real options and the impact of intellectual capital on corporate value

Sudi Sudarsanam · Ghulam Sorwar · Bernard Marr

62 citations0/0 files storedJournal of Intellectual Capital

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Intellectual Capital and Performance Analysis Capital Investment and Risk Analysis Financial Reporting and Valuation Research

Abstract

Purpose The aim of this paper is to discuss intellectual capital (IC) from a valuation perspective and examine the nature of such capital and why traditional valuation methods fail to reflect the unique characteristics of IC and propose an alternative approach that captures them. Design/methodology/approach The paper builds on the existing literature in the fields of financial valuation and IC. The analysis of these fields allows us to combine them and discuss the possible usage and limitations of real option models for the assessment of intellectual capital in firms. Findings A valuation perspective is developed based on the real option models that have been extended from their origin in financial asset valuation to the valuation of firms' growth opportunities. Intellectual resources embody these opportunities contributing to both their evolution over time and their realisation in future. A typology of IC is developed based on the influence upon the various valuation parameters of real options. This approach provides a richer framework to analyse the relationship between IC and corporate value. Practical implications Clarification of the relationship between IC and managerial flexibility as a source of value will help managers understand how they can create and leverage such flexibility to create value. The paper enables managers to understand how different types of IC impact on risk taking, timing of investment projects and the value of speculative investments. Originality/value The paper clarifies the nature of IC in the way it contributes to managerial flexibility to gain competitive advantage and exploit growth opportunities. It extends the real options valuation framework to the valuation of intellectual assets thus providing a link among intellectual assets, business strategy and firm value.

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References

1997Dynamic capabilities and strategic management 1973The Pricing of Options and Corporate Liabilities 1984A resource‐based view of the firm 1983An Evolutionary Theory of Economic Change.1995The Theory of the Growth of the Firm 2006The Core Competence of the Corporation 1993The cornerstones of competitive advantage: A resource‐based view 1973Theory of Rational Option Pricing

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