The real option theory (ROT), a theory on investment decision making under uncertainty, has been applied to analyzing a broad range of questions in international business (IB). In the face of uncertainty, any discretion that the managers of a multinational enterprise (MNE) have over the timing, scale, speed, and sequence of investing or using the firm’s resources, in the forms of physical or intellectual capital or managerial time and effort, can be a real option. Such options confer upon the managers the right, but not the obligation, to exploit the upside potential while limiting the downside risk. Uncertainty, irreversibility, and absence of immediate and complete preemption are three necessary conditions for a real option to create value. Uncertainty offers opportunities to gather more information in the future, and such information can help managers make better decisions or alter prior decisions for improvement. Irreversibility is defined as the proportion of the investment committed to a project that cannot be recouped if the project is abandoned. Preemption refers to the revocation of the decision-making discretion that nullifies the option.
It is possible to distinguish seven types of real options that have been examined in IB studies: (a) option to defer, (b) option to abandon/exit, (c) option to exchange, (d) option to grow/scale up, (e) option to contract/scale down, (f) option to switch, and (g) compound options. These types of options are found to influence a firm’s international market-entry strategies (e.g., location, timing, scale, speed, and mode) and the configuration and organization of the firm’s geographically dispersed production network.
ROT has also been integrated with other economic theories, such as transaction cost economics and resource-based view, to better understand these decisions. Although ROT assumes a strong form of rationality on the part of the decision maker, it is also possible to incorporate cognitive or cultural biases into the theory and give the theory’s analysis greater realism. ROT represents a theoretical approach that can be integrated with various economic and noneconomic theories. More work in such theoretical integration can potentially help researchers gain deeper or more complete understandings of IB questions.
Extant studies in IB typically analyze only a single type of option in isolation. But the global production network of a MNE typically has a portfolio of different types of options embedded, and the different types of options inevitably interact. The study of interactions among two or more types of options under different sources of uncertainty is likely to yield new insights on the strategy and organization of the MNE.
Article
The Application of Real Option Approach in International Business Research
Tailan Chi and Yan Huang
Article
Corporate Governance in Business and Management
Erik E. Lehmann
Corporate governance is a recent concept that encompasses the costs caused by managerial misbehavior. It is concerned with how organizations in general, and corporations in particular, produce value and how that value is distributed among the members of the corporation, its stakeholders. The interrelation of value production and value distribution links the ubiquitous technological aspect (the production of value) with the moral and ethical dimension (the distribution of value). Corporate governance is concerned with this link in general, but more specifically with the moral and ethical dimensions of distributing the generated value among the stakeholders. Value in firms is created by firm-specific investments, and the motivation and coordination of value-enhancing activities and investment is protected by the power concentrated at the pyramidal top of the organization. In modern companies, it is the CEO and the top management who decide how to create value and how to distribute it among the relevant stakeholders. Due to asymmetric information and the imperfect nature of markets and contracts, adverse selection and moral hazard problems occur, where delegated (selected) managers could act in their own interest at the costs of other relevant stakeholders.
Corporate governance can be understood as a two-tailed concept. The first aspect is about identifying the (most) relevant stakeholder(s), separating theory and practice into two different and conflicting streams: the stakeholder value approach and the shareholder value approach. The second aspect of the concept is about providing and analyzing different mechanisms, reducing the costs induced by moral hazard and adverse selection effects, and balancing out the motivation and coordination problems of the relevant stakeholders. Corporate governance is an interdisciplinary concept encompassing academic fields such as finance, economics, accounting, law, taxation, and psychology, among others.
As countries differ according to their institutions (i.e., legal and political systems, norms, and rules), firms differ according to their size, age, dominant shareholders, or industries. Thus, concepts in corporate governance differ along these dimensions as well. And while the underlying characteristics vary in time, continuously or as a result of an exogenous shock, concepts in corporate governance are dynamic and static, offering a challenging field of interest for academics, policymakers, and firm managers.
Article
Executive Severance Agreements: Making Sense of an Emerging, Yet Fragmented, Research Field
Felice B. Klein, Kevin McSweeney, Cynthia E. Devers, Gerry McNamara, and Spenser Blosser
Scholars have devoted significant attention to understanding the determinants and consequences of executive compensation. Yet, one form of compensation, executive severance agreements, has flown under the radar. Severance agreements specify the expected payments and benefits promised executives, upon voluntary or involuntary termination. Although these agreements are popular among executives, critics continually question their worth. Yet severance agreements potentially offer three important (but less readily recognized) strategic benefits. First, severance agreements are viewed as a means of mitigating the potential risks associated with job changes; thus, they can serve as a recruitment tool to attract top executive talent. Second, because severance agreements guarantee executives previously specified compensation in the event of termination, they can help limit the downside risk naturally risk-averse executives face, facilitating executive-shareholder interest alignment. Third, severance agreements can aid in firm exit, as executives and directors are likely to be more open to termination, in the presence of adequate protection against the downside.
Severance agreements can contain provisions for ten possible termination events. Three events refer to change in control (CIC), which occurs under a change in ownership. These are (1) CIC without termination, (2) CIC with termination without cause, and (3) CIC with termination for cause. Cause is generally defined by events such as felony, fraud, embezzlement, neglect of duties, or violation of noncompete provisions. Additional events include (4) voluntary retirement, (5) resignation without good reason, (6) voluntary termination for good reason, (7) involuntary termination without cause, (8) involuntary termination with cause, (9) death, and (10) disability. Voluntary retirement and resignation without good reason occurs when CEOs either retire or leave under their own volition, and voluntary termination with good reason occurs in response to changes in employment terms (e.g., relocation of headquarters). Involuntary termination refers to termination due to any reason not listed above and is often triggered by unsatisfactory performance.
Although some prior work has addressed the antecedents, consequences, and moderators of severance, the findings from this literature remain unclear, as many of the results are mixed. Future severance scholars have the opportunity to further clarify these relationships by addressing how severance agreements can help firms attract, align the interests of, and facilitate the exit of executives.
Article
Governance Through Ownership and Sustainable Corporate Governance
Marc Goergen
Sustainable corporate governance has been defined as corporate governance that ensures corporations are run in such a way that they are sustainable over the long term. Note that for corporations to be sustainable in the long run, they need to ensure the preservation, as well as possibly the enhancement, of their ecosystem. This not only includes establishing and maintaining good relations with their shareholders and stakeholders but also preserving their environment. Here, the term environment should be understood as taking on a broader meaning. Indeed, corporations preserving their environment should not be reduced to mere environmentalism but they should also operate in harmony with the broader economic and social system. Put differently, sustainable corporate governance should also ensure that corporations are run in such a way to avoid future crises, such as the Great Recession. This would require a move away from business models that focus on short-term shareholder value while endangering the survival of the corporation over the long term.
Whereas much of the existing literature suggests that corporations should merely maximize shareholder value and that a stakeholder approach will result in vague and often contradictory objectives for the management, long-term shareholder value creation is nevertheless compatible with the corporation looking after the interests of its immediate, as well as possibly more remote, stakeholders. Ultimately, sustainable business practices will not only benefit the corporation’s employees, customers, and the broader society but also its owners.
The key question that arises is whether there is a link between various types of owners and sustainable corporate governance. A number of related questions emerge. What different types of owners are there and how influential are they in putting their stamp on how their investee firms are managed? Attempting to answer these questions requires revisiting the premise of the principal-agent theory that owners are typically disinterested from engaging with their investee firms. The main critique of this premise is that, even within the Anglo-Saxon corporate governance system, firms tend to have block holders, and there exist activist shareholders. Further, since the 1980s there has been an emergence—as well as an increase in the prevalence—of activist shareholders. Are some types of owners or shareholders more likely to enhance and maintain sustainability than others?
A review of extant evidence on the effects of various types of shareholders on long-term financial and non-financial goals suggests the following. While some types of owners are found to promote and support sustainable corporate governance, the effect of other types is less clear or even negative. This difference in effects could be due to three reasons. First, context, including the national setting, is important. Second, some types of investors, such as sovereign wealth funds, show great diversity in their characteristics and objectives. Finally, the goalposts are shifting with an increasing number of investors embracing corporate social responsibility and environmental, social, and governance issues. Importantly, given the increasingly visible consequences of global warming and societal unrest caused by a worsening of wealth inequality, the transition to a more sustainable society should not merely be the responsibility of corporate owners. Others, including corporate executives and business schools, are key to achieving this transition.
Article
Stock Repurchases: Antecedents, Outcome, and Implications
Abdul A. Rasheed, Jenny Gu, and Greg Bell
Since the early 1980s in the United States and the early 1990s in Europe and Asia, there has been a notable surge in the volume and frequency of share repurchases by companies. There are many different types of repurchases such as open-market repurchases, repurchase tender offers, privately negotiated repurchases, and accelerated share repurchases. Prior research on share repurchases has identified many different motivations identified in prior literature, such as undervaluation, tax advantages, flexibility, takeover defense, and optimal capital structure. In addition, prior research has identified a number of organizational characteristics that can cause a firm to repurchase their shares such as the compensation structure of the executives, managerial characteristics, and managerial entrenchment. A large number of empirical studies have investigated the factors that motivate repurchases and implications of repurchases for stockholders, creditors, executives, and the economy in general. The results of these studies suggest that any generalizations about the benefits of repurchases may be inappropriate and that both the positive and negative effects may be context specific. Stock buybacks are becoming common in countries other than the United States. Empirical research on repurchases in different countries suggests that the motivations, incentives, and effects of repurchases may vary based on not only firm-specific factors but also country-level institutional conditions. We identify several avenues for future research such as the potential for principal–principal conflicts, the implications of governance characteristics for repurchase decisions, different executions strategies, and application of new methodological tools.
