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Control_ Organizational and Economic Approaches - College of .._1_

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									Tony W. Tong, Yong Li




     Presenter: Wen ZHENG
   Tony W. Tong is an assistant professor of management of
    the Leeds School of Business at the University of Colorado.
    He received his Ph.D. from The Ohio State University. His
    current research applies real options theory to study firms’
    corporate development activities such as alliances,
    acquisitions, and corporate venture capital.

   Yong Li is an assistant professor of the School of
    Management at the State University of New York at
    Buffalo. He received his Ph.D. from the University of
    Illinois at Urbana–Champaign. His current research applies
    real options theory to study investment under uncertainty
    and venture capital.
Contents

    Introduction


        Theory and Hypothesis


          Empirical


       Discussion
               • The paper draws from real options
Introduction     theory to compare CVC and
                 acquisition empirically
Theory

Empirical

Discussion
               • The paper draws from real options
Introduction     theory to compare CVC and
                 acquisition empirically
Theory

Empirical         Investment modes that are important tools
                   that firms can employ to further their
Discussion         external business development and
                   corporate growth initiatives.
               • The paper draws from real options
Introduction     theory to compare CVC and
                 acquisition empirically
Theory

Empirical         CVC is the investment of corporate funds
                   directly in external start-up companies.
Discussion
                  It involves an investing firm taking a
                   minority equity stake in a private
                   entrepreneurial company (Gompers and
                   Lerner, 1998).
                          Mode
                                          CVC                 Acquisition
Introduction   Option

Theory                                                    One-time deal and few
                                   Flexible to make
                 Expand                                   sequential investment
                                 sequence investment
                                                                possibility
Empirical
                                  Flexible to liquidate    Difficult to divest a
                Abandon
                                     its investment              company
Discussion
                                   Flexible to defer
                                                          High commitment and
                  Defer          deciding to expand or
                                                           little deferral option
                                       abandon

               Real options become more salient in CVC
               investments compared to acquisitions under
               conditions of uncertainty
               Hypothesis 1 (H1). The greater the level of
Introduction    uncertainty, the more CVC is preferred over
                time.
Theory
                  An increase in the exogenous uncertainty
Empirical          enhance the value of all types of real options.
Discussion           Option to expand and abandon adjust and
                      reverse active reduce downside risk and
                      capture upside should the environment
                      develop favorably.

                     Option to defer Limit exposure to market
                      uncertainty
Introduction
                 Irreversibility
Theory                              Positive relationship
                                    between uncertainty
Empirical      Growth Opportunity    and preference for
Discussion                          CVC over acquisition
                  Competition
               Hypothesis 2 (H2). The greater the level of
Introduction    irreversibility, the stronger the positive
Theory          relationship between uncertainty and the
Empirical       preference for CVC over acquisition.
Discussion        Irreversible: resale value < cost

                     Irreversible  resale value  sensitive to
                      uncertainty Value of Option

                     Acquisition is harder to reverse than CVC
               Hypothesis 3 (H3). The greater the level of
Introduction    growth opportunities, the weaker the
Theory          positive relationship between uncertainty
                and the preference for CVC over acquisition
Empirical

Discussion
                  Growth opportunity Opportunity cost of
                   waiting
                     Indecision loss of profit streams in the present
                      or future periods

                     Downside loss can be less valuable when there
                      is significant upside potential
               Hypothesis 4 (H4). The greater the level of
Introduction    competition, the weaker the positive
                relationship between uncertainty and the
Theory
                preference for CVC over acquisition
Empirical
                  Extent that growth opportunities shared
Discussion         Strategic value of commitment
                     Competitive investment Strategic value of
                      commitment >flexibility value of deferring

                     CVC provides flexibility to defer, while
                      acquisitions signal commitment to potential
                      rivals.
               • Sample: Public firms (Compustat)
               • Year: 2003-2005
Introduction
                  – Coverage of private acquisitions would
Theory              become more accurate and extensive
                    since 2003
Empirical      • CVC: First-round CVC investments
Discussion        – Valuable real options
                  – On a similar footing with acquisitions
               • Acquisition: Acquisition of private targets
               • Acquisition started as CVC
                  – Exercise of the options that are embedded
                    in the initial CVC investment
                Dependent Variable
                  CVC vs. Acquisition
Introduction
                     1 if investment is structured as CVC investment, 0 if
                      structured as an acquisition.
Theory
                Explanatory Variables
Empirical         Exogenous uncertainty
                     Volatility of industry stock market indices
Discussion
                  Irreversibility
                     Asset intangibility
                  Growth Opportunities
                     Market-to-book ratio
                  Level of competition
                     One-minus-industry concentration ratio
                Control Variables (Investment Firms)
                  Size
Introduction
                      Nature log of the firm’s total assets in million
                       dollars.
Theory
                   R&D intensity
Empirical             R&D expenditure as a percentage of sales.
                   Profitability
Discussion
                      Return on sales: income before extraordinary
                       items as a percentage to sales
                   Firm’s experience in CVC versus acquisition
                      Logged the ratio of one plus the number of CVC
                       investments to one plus the number of CVC
                       acquisition.
                Control Variables (Investee’s industry)
                  Industry profitability
Introduction
                      Sum of the income before extraordinary items for all
Theory                 of the firms in the industry in which the investee
                       resides as a percentage of industry sales
Empirical          Industry R&D intensity information asymmetry
Discussion            The amount of R&D expenditures for all of the
                       business in the industry as a percentage of industry
                       sales
                   IP regime
                      Carnegie Mellon Survey of Research and
                        Development
                Control Variables (Investor investee dynamic level)
                   Inter-industry investment
Introduction
                      1 when the investor and the investee operate in two
                       different three-digit SIC industries, and 0 otherwise.
Theory
                   Different State geographic location
Empirical              1 when the investor and the investee are located in two
                        different state, 0 otherwise.
Discussion      Control Variables (Investee characteristics)
                   Investee age
                      Take log of subtract value between the founding
                        year from the current year
                   Investee size
                      Take the log of the number of employees.
               Two Stage Probit model
Introduction      First Stage  Sample selection model
                       Distinguish firms that undertook CVC investments
Theory                   or acquisitions from firms that undertook neither
                         investment
Empirical
                 P( Undertake CVC or acquisition)= f ( size, profitability, R&D
Discussion          intensity, capital intensity , financial leverage)
                  Second Stage
                     The choice of CVC versus acquisition
                 P(Undertake CVC)= f ( Uncertainty, Uncertainty*
                   irreversibility, Uncertainty*Growth opportunities,
                   Uncertainty* competition, Control Variable)
               Descriptive Statistics and Correlation Matrix
Introduction

Theory

Empirical

Discussion
               Heckman Regression Results
Introduction

Theory

Empirical

Discussion                  H1
               Heckman Regression Results
Introduction

Theory

Empirical

Discussion
                                             H2
               Heckman Regression Results
Introduction

Theory

Empirical

Discussion
                                             H3
               Heckman Regression Results
Introduction

Theory

Empirical

Discussion

                                             H4
               Heckman Regression Results
Introduction

Theory

Empirical

Discussion
               Heckman Regression Results
Introduction

Theory

Empirical

Discussion
               Heckman Regression Results
Introduction

Theory

Empirical

Discussion
               Heckman Regression Results
Introduction

Theory

Empirical

Discussion
               Heckman Regression Results
Introduction

Theory

Empirical

Discussion
               Heckman Regression Results
Introduction

Theory

Empirical

Discussion
               Results including investee age and investee
                size
Introduction

Theory

Empirical

Discussion
               Robustness check
                  Another measure of uncertainty
Introduction         Regress industry sales over five years against time and
                      then used the standard error of the regression coefficient
Theory                divided by the mean of industry sales to develop a
                      standardized proxy of uncertainty for each industry and
                      year.
Empirical
                  Another measure of irreversibility
                     Industry inverse leverage
Discussion
                  Explore the sensitivity of the findings to
                   alternative models
                     Technological innovation Companies
                       outside of the high-tech realm
                     Minority acquisition
               • When an investment is surrounded by high
                 levels of market uncertainty, maintaining
Introduction
                 flexibility becomes more important, and
Theory           firms attach greater value to the real options
                 embed in initial CVC investments vis-à-vis
Empirical        acquisition.
Discussion
               • The value of real options under uncertainty
                 is contingent upon several factors that may
                 either increase or decrease such value and
                 therefore my shape firms’ choice between
                 CVC and acquisition. (Irreversibility and
                 Growth opportunity)
               • Focus on only two investment mode
                 Other investment mode like alliance, joint
Introduction
                 ventures
Theory
               • Take the investing firm’s perspective to
Empirical
                 examine investment mode choice From
Discussion
                 the perspective of both the investor and
                 the investee

               • Focus on creation of option Option
                 creation + option implementation

								
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