Journal of Finance and Accounting
ISSN (Print): 2333-8849 ISSN (Online): 2333-8857 Website: http://www.sciepub.com/journal/jfa Editor-in-chief: Apply for this position
Open Access
Journal Browser
Go
Journal of Finance and Accounting. 2013, 1(2), 54-61
DOI: 10.12691/jfa-1-2-3
Open AccessArticle

Technology-Based Startup Valuation Using Real Options with Edgeworth Expansion

Gastón Milanesi1, , Gabriela Pesce1 and Emilio El Alabi1

1Business Administration Department, Universidad Nacional del Sur, Bahía Blanca, Argentina

Pub. Date: October 16, 2013

Cite this paper:
Gastón Milanesi, Gabriela Pesce and Emilio El Alabi. Technology-Based Startup Valuation Using Real Options with Edgeworth Expansion. Journal of Finance and Accounting. 2013; 1(2):54-61. doi: 10.12691/jfa-1-2-3

Abstract

There exists extreme difficulties while trying to valuate, using traditional valuation methods, startup firms which are dedicated to technological development. Among those methods, we could mention the balance sheet-based ones, the relative valuation ones, the cash flow discounting-based ones, and the goodwill-based ones. Those difficulties are the absence of comparable companies, the inexistence of historical data, the complexity to estimate volatility, and the number of intangible assets which give worth to the firm. This paper proposes to valuate this type of entrepreneurships using real options theory making adjustments that allow us to abandon the assumption of normal returns. Methodologically, we use real options theory adapted through Edgeworth expansion. It allows abandoning the probability of normal distribution assumption incorporating higher moments such us asymmetry and kurtosis. Obtained results let us show how the firm’s value and its strategic options are affected by stochastic higher moments’ behavior. These are often not considered because of assuming a normal behavior related to a random path of the underlying assets.

Keywords:
real option technology-based startup edgeworth expansion asymmetry kurtosis firm valuation

Creative CommonsThis work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

Figures

Figure of 1

References:

[1]  Bank, Matthias, and Katrin Wibmer (2011). Start-up firm valuation: A real-options approach. Austria: Working paper University of Innsbruck.
 
[2]  Bernardo, Antonio E., and Bhagwan Chowdhry (2002). “Resources, real options, and corporate strategy,” Journal of Financial Economics, 63, 211-234.
 
[3]  Brandao, Luiz E., James S. Dyer, and Warren J. Hahn (2005). “Using Binomial Decision Trees to Solve Real Options Valuations Problems,” Journal of Decision Analysis, 2, 69-88.
 
[4]  Copeland, Thomas E., and Vladimir Antikarov (2001). Real Options. New York: Texere LLC.
 
[5]  Fracica Naranjo, Germán, Patricia Vaca Vaca, and María P. Sepúlveda Calderón (2011). ‘El empresario en el start up,’ paper presented at the Memorias XXI Congreso Latinoamericano sobre Espíritu Empresarial. Cali, Colombia, March.
 
[6]  Landro, Alberto (2010). Acerca de la Probabilidad: La interpretación del concepto de azar y la definición de probabilidad. Buenos Aires: Centro de Investigaciones en Econometría Facultad de Ciencias Económicas UBA.
 
[7]  Lin, Barry J., and Anthony F. Herbst (2003). “Valuation of a startup business with pending patent using real options.” Accessed on Feb. 3, 2012.
 
[8]  Mun, Johnathan (2004). Real Options Analysis: Tools and Techniques for Valuing Strategic Investment and Decisions. New York: Wiley.
 
[9]  Pratt, Shannon P., and Roger Grabowski (2008). Cost Of Capital: Applications and Examples. New Jersey: John Wiley & Sons.
 
[10]  Rubinstein, Mark (1994). “Implied Binomial Trees,” Journal of Finance, 49 (3), 771-818.
 
[11]  Rubinstein, Mark (1998). Edgeworth Binomial Trees. California: UC Berkeley.
 
[12]  Smit, Han T. J., and Lenos Trigeorgis (2004). Strategic Investment: Real Options and Games. New Jersey: Princeton University Press.
 
[13]  Smith, James E. (2005). “Alternative Approach for Solving Real Options Problems,” Decision Analysis, 2 (2), 89-102.
 
[14]  Trigeorgis, Lenos (1997). Real Options: Managerial Flexibility and Strategy in Resource Allocations. Cambridge: MIT Press.
 
[15]  Wang, Ann, and William Halal (2010).”Comparison of Real Asset Valuation Models: A Literature Review,” International Journal of Business and Management, 5 (5), 14-24.
 
[16]  Wilmott, Paul (2009). Frequently Asked Questions in Quantitative Finance. United Kingdom: John Wiley & Sons.