Corporate Governance: A New Limit to Real Options Valuation?

Including real options in firms' value raises numerous difficulties. Limitations concerning the relevance of option pricing models outside financial markets are the most salient, but carrying out a valuation implies other assumptions, especially on firms' governance. In particular, assessing whether a real option should be included within a firm's boundaries and how its value should be shared, is difficult. Most of these issues result from the different property rights on real options: who creates and who can exercise the option? We discuss existing answers to these difficulties and propose a matrix based on property rights to help practitioners decide whether a real option can be valued appropriately or not by real options models. We support our discussion with a case study based on an R&D firm valuation.