Peter-Jan Engelen

The valuation of a NDA using a 6-fold compound option

Abstract This paper presents a new methodology for valuing new drug applications (NDA) and the R&D of pharmaceutical companies based on real option models. Traditional valuation models fail to capture the full value created by R&D to pharmaceutical companies, because they do not correctly model the nature of the process of developing a new drug. It is a series of consecutive phases from R&D to commercialisation, where each phase is in fact an option on executing the following phase, i.e. a compound option. For a NDA, the R&D phase can best be presented as a 6-fold compound option on the commercialisation phase. Using a generalisation of Geske’s compound option model, we derive a closed-form solution for a n -fold compound option model, and apply it to calculate the value of a NDA using sector average figures.

Investment, Uncertainty and Irreversibility: Evidence from Belgian Accounting Data

This paper investigates the effects of uncertainty on the investment behaviour using firm-level data for a sample of Belgian manufacturing firms. In general, the results confirm former analysis at the aggregate level, stating that uncertainty does matter but that the sign of the effect and its magnitude largely depend on which proxies are used and how they are defined. It is shown that uncertainty has mainly an impact on the decision to invest and to a much lesser extent on the amount invested. Furthermore, the difference between reversible and irreversible investment is crucial. The impact of volatility on irreversible investment is far more larger than on reversible investment. In some cases, the amount of reversible investment will increase with higher volatility.

Compound Real Option Valuation with Phase-Specific Volatility: A Multi-Phase Mobile Payments Case Study

Multi-staged R&D projects are copy-book cases of compound real options. Traditional compound option models assume a constant volatility over the lifetime of the project. Building on the n-fold compound option model of Cassimon et al. (2004), we extend this model to allow for phase-specific volatility estimates, while preserving the closed-form solution of the model. We illustrate the extended model with a case study of a real option valuation of a multi-stage software application project by a large mobile phone operator and we show how project managers can estimate phase-specific volatilities.

Board Diversity as a Shield During the Financial Crisis

This chapter examines the link between board diversity and firm financial performance for a sample of Dutch listed companies during the recent financial crisis. We examine seven dimensions of diversity: nationality diversity, gender diversity, diversity with respect to the level of education, diversity with respect to the field of education, expertise diversity, socioeconomic background diversity and age diversity. Our empirical results show a hyperbolic relation between the focal variables age diversity, expertise diversity and background diversity and firm financial performance. We also find that gender diversity, nationality diversity and diversity with respect to education have no impact on firm performance during crisis times. Our empirical results show that focusing on only one dimension of the full diversity vector or on linear effects only can lead to detrimental economic effects.

Reputational Penalties in Financial Markets: An Ethical Mechanism?

Responsible investment (RI) and responsible corporate behaviour received a lot of attention during the last decade in the corporate social responsibility (CSR) literature (McWilliams and Siegel 2001, 2006). After the U.S. and European financial markets were being troubled in the early 2000s by several major scandals like Enron, Worldcom, Tyco and Parmalat, financial ethics received a lot of attention by the public as well. Irresponsible corporate behaviour can occur in different ways such as corruption, market abuse, fraud, insider trading, ecological harm, racial or sexual discrimination. Examples include foreign briberies to get supply contracts (Volkswagen), insider trading ahead of a profit warning (EADS), lower salaries for female employees (Wal-Mart), and worker’s conditions in Indonesia (Nike).

What determines crime rates? An empirical test of integrated economic and sociological theories of criminal behavior

Abstract Research on crime has by no means reached a definitive conclusion on which factors are related to crime rates. We contribute to the crime literature by providing an integrated empirical model of economic and sociological theories of criminal behavior and by using a very comprehensive set of economic, social as well as demographic explanatory variables. We use panel data techniques to estimate this integrated crime model for property and violent crime using the entire population of all 100 counties in North Carolina for the years 2001–2005. Both fields contribute to the explanatory power of the integrated model. Our results support the economic explanation of crime with respect to the deterrent effect of the probabilities of arrest and imprisonment concerns, as well as the time allocation model of criminal activities. In contrast, the integrated model seems to reject the impact of the severity of punishment on crime levels. With respect to the sociological theories of crime, we find most support for the social disorganization theory and for the routine activity theory. Finally, we find differences between property and violent crimes, mostly explained by the sociological models.

Structural Problems in the Design of Market Abuse Regulations in the EU

This article analyzes the regulatory and supervisory design of market abuse regulations in the EU in order to set the right incentives for corporate insiders to abstain from illegal trading. The analysis is illustrated by the Belgian insider trading law. Although the level of punishment seems to be rather high, the probability of conviction for insider trading is very low. The analysis suggests that the expected costs component of this crime is too low compared to the expected insider trading profits. In order to obtain a higher deterrence of the insider trading prohibition, a change in the design of the financial regulation and supervision must be made. To increase the probability of conviction broad investigative powers and the authority to impose administrative sanctions have to be assigned to the financial markets supervisor, as was recently the case with the European Market Abuse Directive. JEL classification: K42

Impact of the legal and institutional framework on the financial architecture of new economy firms in developing countries

Abstract This paper analyses the impact of the legal and institutional framework on the financial architecture of new economy firms in developing countries. Apart from the more conventional institutional and legal barriers, which are advanced by the recent law and finance literature, the analysis in this paper focuses on the importance of the information and communications technologies (ICT) environment, as a potentially important barrier to the development of the business sector in general, and new economy firms in particular. This analysis confirms the importance of this ICT environment for (a) the asset structure (and the creation of intangible assets), (b) for the financial structure, and ultimately, (c) for firm growth.

Effects of firm-level corporate governance and country-level economic governance institutions on R & D curtailment during crisis times: Theory and Evidence from Firms and Nations

This book aims to disentangle the complex relationship between innovation and its potential determinants, paying special attention to the roles of governance and regulatory frameworks, and the ways in which the latter interact with other drivers of innovation such as competition and the innovator’s closeness to the technology frontier.

Decomposing the Value of a Pharmaceutical Firm

Traditional valuation tools such as discounted cash flow (DCF) models fail in valuing research and development (R&D)-intensive pharmaceutical firms adequately because most of the market value of the firm is embedded in unexercised real options whose future value is uncertain at this moment. From this basic insight, it follows that the (value of the) firm should optimally be characterised as a portfolio of real options, and also that compound option models should optimally be used to value the firm’s ‘products’ based on the typical development process of new drugs. The overall market value of a pharmaceutical company can then be decomposed taking into account the firm’s specific portfolio of ‘products’ being at different stages of the drug development process. In this paper, we develop the general structure and apply that framework to a stylised real-life example.