Real options in divestment alternatives

  • Damaraju N
  • Barney J
  • Makhija A
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Abstract

This paper examines the implications of real options theory for both the decision to divest a business unit and the mode of divestment. It is shown that the decision to divest a business unit and the decision to engage in staged modes of divestment are both sensitive to uncertainty, consistent with the real options logic. However, in the face of uncertainty, the results suggest that staged forms of governance create real options that are of lesser value as compared to simply not divesting a business unit. Thus, this study shows that firms have real options of varied value to choose from in the context of divestments.

Author-supplied keywords

  • divestment mode choices
  • divestment strategies
  • divestments
  • real options
  • uncertainty

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Authors

  • Naga Lakshmi Damaraju

  • Jay B. Barney

  • Anil K. Makhija

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