Managerial Judgement and the Real Options Approach in the Investment Appraisal Process

337 Pages·2010·16.48 MB·English

Bournemouth University
Managerial Judgement Real Options Approach in the
the
and
Investment Appraisal Process: Evidence from the British
Automotive Components Manufacturers
OUBAY MAHMOUD
Doctor Philosophy
of
September 2008
PhD 0. Mahmoud
Copyright
statement
This has been it is
the thesis that
copy of supplied on condition anyone who consults
its its due
to that
understood recognise copyright rests with author and acknowledgement
be in, derived from,
the this thesis.
must always made of use of any material contained or
PhD 0. Mahmoud
Managerial Judgement the Real Options Approach in the
and
Investment Appraisal Process: Evidence from the British
Automotive Components Manufacturers
OUBAY MAHMOUD
for
A in fulfilment Bournemouth University the
thesis the
submitted partial of requirements of
degree Doctor Philosophy
of of
September 2008
Bournemouth University
PhD 0. Mahmoud
Managerial Judgement the Real Options Approach in the Investment
and
Appraisal Process: Evidence from British Automotive Components
the
Manufacturers
OUBAY MAHMOUD
Abstract
has been financial (Pay
While there the techniques
extensive research on use of appraisal
back, Return Capital Employed, Internal Rate Return Net Present Value) in the
on of and
Investment Appraisal Process (IAP), little has been the the Real
research conducted on role of
Options Approach (ROA) Managerial Judgement (MJ) in IAP. In ideal
the world,
and an
benefits
to Strategic Investment Decisions (SIDs), detailed the
prior making a analysis of
by the investments be This financial
and non-
generated would conducted. would cover
basis
financial benefits. In however, investments the
of
practice, many are undertaken on
financial little the in the
proposed
returns with or no analysis of growth options embedded
business
investments. The these to the the
exploitation of options contributes enhancement of
financial do. Essential to these in the IAP is the
strategy as returns considering options
deployment MJ in the IAP.
of
literature
This development
thesis to to the the
aims make a sound contribution of emerging
investment
budgeting. First, it
the
appraisal
on capital provides a critical review of existing
literature. Second, it investigates British Automotive Components
whether or not
Manufacturers (BACMs) deploy the ROA MJ in the IAP in to the
and order accommodate
by
And finally, it the IAP the
growth options. presents an alternative perspective of
development framework that integrates the ROA & MJ into the IAP, while
of a conceptual
business
taking
account of project risk and strategy.
by
This draws 73-firm finance directors in industry
this enhanced
research on a survey of
(ROA
fieldwork (11 interviews) importance
to the the
set out relative of strategic approach
informed by MJ) financial SIDS. The findings from the
the survey
and analysis when making
in PB the
show similar results to earlier studies relation to the popularity of and use of more
DCF
financial in IAP. However, in
than one technique the contrast to previous studies,
be less higher ROCE is
techniques to and no relationship
seem popular and usage of evident,
is found between in the IAP. The
the type techniques
used
company size and range and of
formal
thrust the findings the is the the adoption of
main of of statistical analysis absence of
the ROA in the IAP. However, the impact the the deployment of
of growth options regarding
MJ in the IAP be The MJ is
to that considered when
appeared evident. analysis shows
.
fieldwork
both investments The
assessing with growth options and risky projects. provides
insights into the the IAP the factors that influence the deployment the ROA
context of and of
MJ in IAP. Conclusions drawn interrelationships between financial
the
the
and are regarding
analysis and the ROA and MJ in the IAP. The integration of the ROA and MJ into the IAP
involve financial
appears to moving the focus of attention in the IAP away from analysis and
More importantly, it
towards
a short-term perspective a more strategic perspective.
to bridging the between
contributes gap risk management and strategic analysis.
PhD 0. Mahmoud
List figures
of
Figure 1.1. Thesis Structure 23
..............................................................................
Figure 2.1. Strategic Investment Appraisal Process 29
................................................
Figure 2.2. A Simple Capital Budgeting System 31
.....................................................
Figure 2.3. The Six Levers Financial Real Options 58
of and
..........................................
Figure 3.1. Deductive Research Design 88
................................................................
Figure 3.2. The Strategic Investment Appraisal Process 93
............................................
Figure 3.3. Operationalisation Process Research Concepts 100
of
.....................................
Figure 3.4. Research Design 107
............................................................................
Figure 4.1. Procedures for Qualitative Analysis 125
.....................................................
146
Figure 5.1. Respondents' Experience in Years
.......................................................
197
Figure 6.1. The Investment Appraisal Process Structure
...........................................
236
Figure 7.1. Formal Informal Communications in IAP
the
and
....................................
250
Figure 7.2. The Strategic Investment Appraisal Process Dynamic Process
as a
................
254
Figure 7.3. The Strategic Investment Appraisal Process BACMs
the
among
.................
PhD 0. Mahmoud
List tables
of
Table 1.1. Sales UK-Produced Vehicles 15
of
...........................................................
Table 2.1. Pros Cons Financial Appraisal Techniques 34
and of
.....................................
38
Table 2.2. Reported Financial Techniques in Manufacturing Industry
use of
.....................
86
Table 3.1. The Main Characteristics Research Philosophies
the
of
................................
Table 3.2. Differences between Deductive Inductive Approaches to Research............ 89
and
96
Table 3.3. Description the Research Variables
of
....................................................
Table 3.4. The Link between Research Hypotheses Related Literature 99
and
.....................
102
Table 3.5. Operationalisation Research
of
-Concepts
...............................................
114
Table 4.1. Main Features Data Types
of
.............................................................
131
Table 4.2. Justification for Data Collection Methods
..............................................
141
Table 5.1. Invalid Responses Non-Respondents' Justifications
and
.............................
for Non-Response
Table 5.2. Results Kruskal-Wallis ANOVA
the
of one-way
143
Bias
........................................................................................................
143
Table 5.3. Significance Level Mean Ranks Differences
the
of
...................................
144
Table 5.4. Results Mann-Whitney U for Non-Response Bias
test
of
............................
144
Table 5.5. Significance Level Mean Ranks Differences
the
of
...................................
145
Table 5.6. Respondents' Identity
......................................................................
147
Table 5.7. Respondents' Working Experience in Years
...........................................
147
Table 5.8. Descriptive Statistics Respondents' Working Experience in Years
on
.............
148
Table 5.9. Educational Level Respondents
the
of
...................................................
148
Table 5.10. Characteristics Respondents Undeclared Qualifications
of with
....................
149
Table 5.11. Responding Firms' Status
................................................................
149
Table 5.12. Responding Firms' Size by Turnover in 2005
.........................................
150
Table 5.13. Investment Activity Sample Firms During 2005
the
of
..............................
151
Table 5.14. Incidence Financial
Appraisal Techniques
of
.........................................
Table 5.15. Friedman Test Results for Financial Appraisal Techniques Usage 151
................
Table 5.16. Results the Kruskal-Wallis ANOVA for Investment Appraisal
of
one-way
Techniques Usage Different-Sized Companies 153
within
.............................................
PhD 0. Mahmoud
Table 5.17. Comparison between the Findings this Study Previous Studies Regarding
of and
Financial Techniques 154
the
use of
........................................................................
Table 5.18. Importance Financial Techniques in Assessing Investments Growth
of with
Options 155
....................................................................................................
Table 5.19. Reported Usage Risk Techniques 156
of
....................................................
Table 5.20. The Intensity the Use Risk Techniques 156
of of
..........................................
Table 5.21. Formal Adoption the ROA 158
of
...........................................................
Table 5.22. Importance MJ Factors in Assessing Investments Growth
of with
159
Options
....................................................................................................
Table 5.23. Level MJ deployment Respondents 160
of amongst
......................................
Table 5.24. Level MJ deployment 161
of
................................................................
Table 5.25. Reliability Test the Measure the Importance MJ Factors in Assessing
of of of
163
Investments Growth Options
with
.....................................................................
Table 5.26. Results the Mann-Whitney Test for Appraisal Techniques MJ Factors
of and
165
Groups
two
within
.......................................................................................
Table 5.27. Significance Levels Mann-Whitney Test Results for Appraisal Techniques
the
of
166
MJ Factors two Groups
and within
.....................................................................
Table 5.28. Results the Mann-Whitney Test for the Importance the ROA Factors within
of of
167
Groups
two
................................................................................................
Table 5.29. Significance Levels the Mann-Whitney Test Results for the Importance of the
of
168
ROA Factors two Groups
within
......................................................................
169
Table 5.30. Attitudes Towards Quantifying ROA Factors
........................................
170
Table 5.31. Mann-Whitney Test in Relation to Quantifying ROA Factors
......................
Table 5.32. Significance Levels the Mann-Whitney Test in Relation to Quantifying ROA
of
170
Factors
....................................................................................................
Table 5.33. Reliability Test the Measure MJ, Factors in Assessing Risky
of of
171
Projects
....................................................................................................
Table 5.34. Attitudes towards the Validity MJ Factors in Assessing High Risk
of
Projects 172
....................................................................................................
Table 5.35. Correlation between Risk Associated
the MJ Factor (Past Experience) the
and
Proposed 173
the Project
with
..............................................................................
Table 5.36. Correlation between MJ Factor (Intuition & Own Judgement) the Risk
the and
Associated 174
the Proposed Project
with
.................................................................
0. Mahmoud
PhD
Table 5.37. Results Mann-Whitney Test Statistic Regarding MJ Company Size
the
of and
175
..............................................................................................................
Table 5.38. Significance Levels Mann-Whitney Test Regarding MJ Company Size
the
and
of
175
..............................................................................................................
176
Table 5.39. Correlation between Company Size MJ
and
............................................
Table 5.40. Results the Mann-Whitney Test for Underlying Motives for MJ two
of within
178
Groups
.....................................................................................................
Table 5.41. Significance levels the Mann-Whitney Test Results in Relation to the
of
179
Underlying Motives for MJ Groups
two
within
.....................................................
Table 5.42. Results the Mann-Whitney Test for the Intensity the Risk Techniques within
of of
181
two Groups
...............................................................................................
Table5.43. Significance Levels the Mann-Whitney Test Results in Relation to the Intensity
of
182
the Risk Techniques two Groups
of within
..........................................................
183
Table 5.44. Hypotheses Testing Summary
..........................................................
188
Table 6.1. Judgemental Classification the Sample Members
of
...................................
269
Table 8.1. Checklist Research Objectives
of
........................................................
PhD
0. Mahmoud
Acknowledgement
Much in
the this thesis is to team: Mr. Stewart
of credit completing ascribed my supervisory
Dickinson & Dr. Bill Neale invaluable
who provided guidance and support.
I tribute to Dr. John Beavis from Bournemouth University for
sincerely pay comments
the the data SPSS to
received regarding analysis of quantitative using package, and also
Professor Phil Johnson from Sheffield University for
the the
reviewing analysis of qualitative
data Template Analysis. I for for
them the
using am very grateful checking and reviewing
for
this
empirical evidence study.
I indebted to the following individuals for
their the
am parties and support over period of my
Bournemouth University: Syrian by Tishreen University
the
study at government represented
for British Accounting Association Annual Conference
the
sponsoring me, participants at
( 3-5 April 2007, Royal Holloway College, University London), the British
of participants at
Academy Management Annual Conference (11-13 September 2007, Warwick Business
of
School, University Warwick, Coventry) for in to
of comments received relation papers
in these IBAL Bournemouth
presented conferences, academic and administrative staff at at
University Professor Colin Armistead, Professor Phil Hardwick, Dr. Julia Kiely, Dr. Julie
:
Robson, Trefor McElroy, Jannie Bowen, IBAL thanks to
research students at with particular
Ahmad Al-Sharif.
my colleague
Thanks due to finance directors the British Automotive Components Manufacturing
are
at
Companies for in I
taking this them
part study. wish every success.
I like
family friends for
would to to their support.
express my gratitude my and endless
Oubay MAHMOUD
PhD 0. Mahmoud
Dedication
heart,
dedicated
This is
thesis to the to
closest person my
My MOUTIA ISMAEL
mother