PUBLICATIONS
Use behavioral option games to make better executive decisions!
This research bridges behavioral economics and corporate finance to improve acquisition decision-making under uncertainty. Through toolkits, theoretical frameworks, and empirical studies, we have examined how biases in risk perception, judgment, and financial market mispricing impact acquisition strategies, revealing weaknesses in traditional valuation methods like discounted cash flow. Over the past decade, with applications in private equity, mining, and telecommunications, we observed that experienced acquirers excel by adopting a broader, strategic perspective, intuitively managing uncertainty and path dependencies to turn uncertainty into an advantage.
Creating More Accurate Acquisition Valuations
Toolkit: In Creating More Accurate Acquisition Valuations we show how psychological biases undermine traditional valuation methods. Using valuation tools that blend real options and game theory, we help managers improve accuracy by incorporating flexibility and competitive dynamics, making acquisition decisions more strategic and reliable.
Smit, J.T.J. & Lovallo, D. 2014. Creating More Accurate Acquisition Valuations. MIT Sloan Management Review, 56 (1), pp. 63-71.
Playing at Serial Acquisitions
Toolkit. In Playing at Serial Acquisitions, we focus on a particular tension: how cognitive biases can “infect” rational analysis and lead executives to manipulate—inadvertently or knowingly—their analyses to get the answers they expect or require. The specific advantage of the rational approach we propose is that it allows for adjustments to prevent such “irrational infection” of the rational analysis of valuation. Using Vodafone as an example, Playing at Serial Acquisitions proposes a modified option-game toolkit for serial acquisition strategy, helping managers anticipate irrational rival behavior and enabling rational and intuitive decision-making under uncertainty. Smit, J.T.J. & Moraitis, T., 2010. Playing at Serial Acquisitions. California Management Review, 53(1), pp. 56-89.
Similar Bidders in Takeover Contests
Theory. How similar are the bidders in takeover contests? When bidders in takeovers share similar resources and strategies, their valuations often overlap. Our model reveals that intermediate similar bidders generate the highest acquisition prices and the greatest likelihood of competitive bidding. Laboratory experiments of bidding behavior confirm that similarity has non-monotonic effects on prices and contest frequency, offering fresh insights into takeover dynamics.
Dai, Y., Gryglewicz, S., Smit, J.T.J. & De Maeseneire, W., 2013. Similar Bidders in Takeover Contests. Games and Economic Behavior, 82, pp. 544–561
Buy Smart, Time Smart
Empirical. Takeover waves can arise from growth opportunities or market mispricing. Our empirical analysis in this article reveals that bidders "buy smart," using high valuations from growth and mispricing to target less overpriced firms with strong fundamentals. They also "time smart," accelerating acquisitions during overvaluation to buffer against future price corrections. Takeovers are driven by both!
Bekkum, S. van, Smit, J.T.J. & Pennings, E., 2011. Buy Smart, Time Smart: Are Takeovers Driven by Growth Options or Mispricing? Financial Management, 40(4), pp. 911–940.
Serial Takeover Strategies
This research area presents a valuation framework for serial acquisition strategies, such as buy-and-build, by highlighting their option-like flexibility and competitive dynamics rather than viewing them as isolated deals. It equips management to address key questions: What growth opportunities arise from the acquisition? When should organic growth be prioritized over strategic acquisitions? How will industry responses influence the acquisition’s value? By combining insights from market economics and modern finance, this approach offers a rigorous and structured method to analyze the strategic dimensions of serial acquisitions, empowering forward-thinking and value-driven decision-making
Acquisition Strategies as Option Games
Toolkit. In 1996, HAL Investments, a European private equity firm, acquired Pearle Benelux, a leading optical chain in Belgium and the Netherlands, marking the start of a strategic “buy-and-build” journey. HAL expanded further with acquisitions in Belgium, the Netherlands, Germany, Austria, and Italy, all within the optical industry. The buy-and-build strategy involves an initial "platform" acquisition, which serves as a foundation for leveraging core competencies and efficiencies across subsequent acquisitions, often in new geographical markets. The article Acquisition Strategies as Option Games examines the valuation of such strategies, offering insights into how they create value through scalability and strategic synergies.
Smit, J.T.J., 2001. Acquisition Strategies as Option Games. Journal of Applied Corporate Finance, 14(2), pp.79–89.
Strategic Options in Serial Acquisitions
Toolkit. Strategic Options in Serial Acquisitions is joint work with an experienced board executive on how to value and design a serial acquisition strategy. The proposed approach highlights how platform acquisitions effectively change the universe of future acquisition opportunities available to the firm and also to its competitors. Most importantly, it provides a framework for directly integrating finance and acquisition strategy in an uncertain environment.
Smit, J.T.J. & Moraitis, T. 2010. Strategic Options in Serial Acquisitions. Long Range Planning, 43, pp. 85 – 103
Playing at Serial Acquisitions
Toolkit. In Playing at Serial Acquisitions, we focus on a particular tension: how cognitive biases can “infect” rational analysis and lead executives to manipulate—inadvertently or knowingly—their analyses to get the answers they expect or require. The specific advantage of the rational approach we propose is that it allows for adjustments to prevent such “irrational infection” of the rational analysis of valuation. Using Vodafone as an example, Playing at Serial Acquisitions proposes a modified option-game toolkit for serial acquisition strategy, helping managers anticipate irrational rival behavior and enabling rational and intuitive decision-making under uncertainty.
Smit, J.T.J. & Moraitis, T. 2010. Playing at Serial Acquisitions. California Management Review, 53(1), pp. 56-89.
Valuation using Real Options and Games
This research demonstrates how to use strategic options and games to quantify the option value of technology investments. Research and product development in electronics, capacity expansion in telecommunications or strategic acquisitions to enter new markets are examples of strategic investments that are difficult to analyse based on standard discounted cash flow approaches. Yet these decisions determine a firm's competitive success in a dynamic technological and competitive landscape. How much is such a strategic option worth? How does one analyse strategic options in a dynamic, competitive environment? We describe basic principles for analysing competitive strategies under uncertainty by incorporating game theory in real options analysis.
Strategic Options and Games in Analysing Dynamic Technology Investments
Toolkit. Stay Loose. By breaking decisions into stages, executives can build flexibility into their plans
Trigeorgis, L.T., Brosch, R., and Smit, J.T.J., 2007. The Journal report: Business Insight Strategy: Stay Loose. The Wall Street Journal, R4.https://www.wsj.com/articles/SB118841806712612518
Toolkit. The article Strategic Options and Games in Analysing Dynamic Technology Investments addresses questions such as “How can one determine the value of a strategic growth option such as Microsoft's future growth opportunities?” And, given anticipated competitive reactions, “How does one analyse such strategic options in a dynamic, interactive competitive environment?”
Smit, J.T.J., and Trigeorgis, L.T., 2007. Strategic Options and Games in Analysing Dynamic Technology Investments. Long Range Planning, 40(1), pp. 84-114.
A Real Option and a Game Theoretic Approach to Corporate Investment Strategy under Competition.
Theory. A Real Option and a Game Theoretic Approach to Corporate Investment Strategy under Competition is a very early publication in the field of real options that combines real options and game theory, using microeconomic tools to analyze how competition impacts investment strategies and cash flow forecasts. A key focus is on economic rents—profits exceeding the opportunity cost of capital—which attract market entrants and diminish returns unless the firm has a competitive advantage. Firms must target markets where they possess a temporary or permanent edge, as delaying investments in markets with temporary advantages erodes project value. We propose investment tactics based on a firm's competitive strength and the interplay of project value with market uncertainty.
Smit J.T.J., and Ankum, L.A., 1993. A Real Option and a Game Theoretic Approach to Corporate Investment Strategy under Competition. Financial Management, 22(3), pp. 241-250.
Real options and strategic games under different information structures
Theory. This study develops and elucidates implementation of a new valuation construct, “Strategic Net Present Value (NPV),” that integrates real options and game theory to more accurately portray strategic decisions underlying management theory. Among the most difficult firm strategic choices in capital intensive industries, such as energy, mining, chip manufacturing, and infrastructure development, is the trade-off between making a long-term commitment or holding off on investment in the face of demand, technological, and competitive uncertainties. The study provides new insights on the way various conditions, such as learning-experience effects, technological uncertainty, and proprietary information, interact to tilt the balance in the interplay between commitment and wait-and-see flexibility. As such, Strategic NPV adds to our understanding of when NPV, real options, or strategic thinking matter more critically for decision-making.
Smit, J.T.J. and Trigeorgis, L. 2017. Strategic NPV: Real options and strategic games under different information structures. Strategic Management Journal, 38(13), pp. 2444-2464.
Flexibility and Games in Strategic Investment
Toolkit. In Flexibility and Games in Strategic Investment, we present a framework for value-based strategic planning combining concepts and tools from strategy and finance. Our ‘Expanded NPV’ framework reconciles flexibility and strategic commitment, viewing strategic planning as managing a portfolio of real options with competitive interactions. The flexibility and strategic value of a business strategy are interwoven with that strategy’s design. We synthesize real options and game theory to evaluate projects or acquisitions. We connect strategic planning and the underlying sources of value creation with the market value of the firm and its three main value components: expected cash flows or assets in place (NPV), flexibility (growth options), and strategic value (moves and games). We develop implications depending on simple or compound growth options, the type and competitive impact of the investment, and relative market power.
Smit, J.T.J. & Trigeorgis, L., 2010. Flexibility and Games in Strategic Investment. Multinational Finance Journal, 14(1/2), 125-151.
Real options and games: Competition, alliances and other applications of valuation and strategy
Toolkit. This study illustrates the use of real options valuation and game theory principles to analyze prototypical investment opportunities involving important competitive/strategic decisions under uncertainty. It uses examples from innovation cases, alliances and acquisitions to discuss strategic and competitive aspects, relevant in a range of industries like consumer electronics and telecom. It particularly focuses on whether it is optimal to compete independently or coordinate/collaborate via strategic alliances.
Smit, H., & Trigeorgis, LT. (2006). Real options and games: Competition, alliances and other applications of valuation and strategy. Review of Financial Economics, 15(2), 95-112.
Return characteristics of strategic options
Theory. The article Return Characteristics of Strategic Options examines how imperfect competition shapes the return distribution of strategic growth options, integrating real options theory with a Cournot-Nash framework. Simulations reveal the way traditional option variables significantly influence return moments, while uncertain preemption introduces payoff discontinuities, increasing skewness and kurtosis. When first-mover advantages are critical, investment-timing differences can create bimodal return distributions, favoring the first mover with higher return potential.
Smit, J.T.J. and Haanappel, H.T., 2007. Return characteristics of strategic options. Annals of Operations Research, 151(1), pp. 57–80.
Exploration, Innovation, and Managing Portfolios of R&D Projects
These studies invite researchers, practitioners, and policymakers to rethink investment strategies in capital-intensive and innovative industries facing uncertainty. By showcasing a comprehensive application of options methodology for exploration investments, these articles provides a practical and innovative perspective. This calls for a fresh approach to portfolio construction strategies, offering insights into navigating uncertainty and unlocking growth potential. Discover a value-based strategic planning framework tailored to managing corporate real options in competitive markets, highlighting how portfolios of conditional R&D projects behave uniquely.
Investment analysis of offshore concessions in the Netherlands
Toolkit. This paper offers a deep dive into the valuation of a complex capital project: the staged development of an oil field concession on the Dutch Continental Shelf. With a focus on flexibility, the analysis explores how management can adjust investments as uncertainty unfolds over time. By presenting a full "soup-to-nuts" application of options methodology for exploration investments, the paper invites readers to engage with a practical and innovative approach. Central to the model is the replication of producing field valuations using Brent crude oil futures. The findings reveal that exploration investments in high-uncertainty "speculative blocks" are not just tools for uncertainty resolution but also deliver greater value compared to low-uncertainty projects.
Smit, J.T.J., 1997. Investment analysis of offshore concessions in the Netherlands. Financial Management - FM, 26(2), pp. 5-17.
Strategic Planning: Valuing and Managing Portfolios of Real Options
Toolkit. Explore a value-based strategic planning framework designed to manage corporate real options in competitive markets. Discover how firms can exploit synergies, achieve timing advantages, and gain an edge through adaptability and responsiveness. This approach integrates strategic management insights with advanced financial valuation tools, offering a way to navigate uncertainty, adapt resources, and outmaneuver rivals. A portfolio toolkit with two key metrics—current asset profitability and future growth option value—can guide active portfolio planning, enabling organizations to thrive in dynamic, competitive environments.
Smit H.T.J., and L. Trigeorgis, 2006, Strategic Planning: Valuing and Managing Portfolios of Real Options. R&D management, 36, (4), 403-420.
A Real Options Perspective on R&D Portfolio Diversification
Theory. This paper demonstrates that the conditionality of investment decisions in R&D, characterized by a hockey stick payoff, significantly impacts portfolio risk and challenges traditional diversification strategies. Real option theory highlights that R&D projects exhibit conditional, option-like risk and return properties, distinguishing them from unconditional projects. While portfolio risk always depends on project correlations, portfolios of conditional R&D projects behave differently. If these projects are negatively correlated, diversification has limited impact on risk reduction. Conversely, if projects are positively correlated, diversification proves more effective than conventional models suggest, warranting a reevaluation of portfolio construction strategies.
Bekkum, van S, Pennings, E., Enrico Smit, J.T.J., 2009, A Real Options Perspective on R&D Portfolio Diversification. Research Policy, 38 (7), pp. 1150-1158
How Executives Can Use Toeholds to Improve Acquisition Decisions
Toehold strategies, where acquirers purchase a small stake in a target company before a full takeover, are often perceived as advantageous. Yet, they are seldom used in modern corporate takeovers and appear to have little measurable impact on acquirer returns. Does this mean toeholds are ineffective or outdated? Our research suggests otherwise. Toeholds are often employed in complex or challenging takeovers. They allow acquirers to "test the waters," gaining valuable insights into the target company and its market while signaling commitment. This strategy is particularly useful in high-stakes or uncertain acquisition scenarios.
Journal of Financial and Quantitative Analysis
Empirical. Despite their perceived advantages, toehold strategies are seldom used in modern corporate takeovers and appear to have little impact on acquirer returns. Does this mean toeholds are ineffective or outdated? Our research suggests otherwise. Toeholds are typically employed in challenging takeovers, and once this endogeneity is accounted for, they are shown to increase acquirer returns. Furthermore, their effectiveness has improved over time, driven by more selective and strategic use. This improvement is partly attributed to learning from previous toehold acquisitions, making these strategies more refined and impactful.
Dai, Y., Gryglewicz, S., & Smit, J.T.J., 2021. Less Popular But More Effective Toeholds in Corporate Takeovers. Journal of Financial and Quantitative Analysis, 56(1), pp. 283-312dit me. It's easy.
Toehold acquisitions as behavioral real options
Toolkit. Dealmakers often overlook uncertainty due to behavioral biases, leading to failed acquisitions. Toeholds offer a strategic way to test deals and manage uncertainty. An expanded valuation toolkit focusing on uncertainty and biases can help executives better assess and utilize minority stakes as a safer alternative to full acquisitions in uncertain situations.
Smit, J.T.J., & Kil, J. 2017. Toehold acquisitions as behavioral real options. California Management Review, 59(3), pp. 42-73
Growth Options in Institutional Quality, Infrastructure, and Environmental Policy
These studies highlight the diverse applications of investments that deliver societal growth option value, including improvements in institutional quality, infrastructure development, and strategies to mitigate CO2 emissions. Our findings provide actionable insights for both public policymakers and corporate leaders on the growth potential unlocked by institutional quality or other infrastructure investments . Policymakers can use these insights to craft strategies that promote institutional development, enhance infrastructure, and advance environmental policies tailored to their national priorities.
Real Options and Institutions
Empirical. In an empirical study, we compare firm-level growth option values across 34 countries and find that economic uncertainty and various institutional measures of transactional uncertainty have opposite effects on the value of a firm's growth opportunities. Interestingly, in countries with lower transactional uncertainty, economic uncertainty in the business environment has a stronger positive correlation with proportional growth option value.
The implication of our study is that robust institutions—such as well-defined property rights, effective business regulations, and strong contract enforcement—are critical preconditions for firms to capture and maximize growth option value under conditions of economic uncertainty.
Various applications of Institutional quality on social, hedging of Co2 emissions, and infrastructure investment
Smit, H., Pennings, E., & van Bekkum, S., 2017. Real Options and Institutions. Journal of International Business Studies, 48(5), pp. 620-644.
Infrastructure investment as a real options game: the case of European airport expansion.
Toolkit. This article analyzes the optional and strategic features of infrastructure investment. Infrastructure investments generate other investment opportunities, and in so doing change the strategic position of the enterprise. A combination of real options theory and game theory can capture the elusive value of a strategic modification of a firm's position in its industry. My model focuses in particular on an analysis of European airport expansion. Airports with infrastructures that are less constrained by growth regulations capture more value, because they are in a better position to exercise growth options available in the airport industry.
Smit, J.T.J. (2003). Infrastructure investment as a real options game: the case of European airport expansion. Financial Management - FM, 32(4), pp. 27-58.