Next Article in Journal
Exact Solutions to the Fractional Differential Equations with Mixed Partial Derivatives
Previous Article in Journal
Fuzzy Analogues of Sets and Functions Can Be Uniquely Determined from the Corresponding Ordered Category: A Theorem
Previous Article in Special Issue
A Fuzzy Trade-Off Ranking Method for Multi-Criteria Decision-Making
Article Menu

Export Article

Open AccessArticle

Incentive Compatible Decision Making: Real Options with Adverse Incentives

Bissett School of Business, Mount Royal University and Canadian Institute for Innovation and Development, Calgary, AB T3E 6K6, Canada
Received: 9 January 2018 / Revised: 2 February 2018 / Accepted: 3 February 2018 / Published: 7 February 2018
(This article belongs to the Special Issue Multi-Criteria Decisions)
PDF [1311 KB, uploaded 7 February 2018]


In this paper, we examine the real options approach to capital budgeting decision making in the presence of managerial adverse incentives. We show that real options have the potential to be value enhancing or value destroying depending on the managerial incentives that may result from having objectives different from firm value maximization. We further examine the possibility of using a generic residual income based rule of managerial compensation to induce the proper investment incentives and we seek to determine the cost-of-capital that must be employed in such a rule. Using numerical examples it is demonstrated that in general, a range of incentive compatible costs-of-capital exists across all managerial investment horizons but not across all managerial hurdle rates. View Full-Text
Keywords: corporate financial decisions; real options; adverse incentives; optimal boundary corporate financial decisions; real options; adverse incentives; optimal boundary

Figure 1

This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).

Share & Cite This Article

MDPI and ACS Style

Osakwe, C.-J.U. Incentive Compatible Decision Making: Real Options with Adverse Incentives. Axioms 2018, 7, 9.

Show more citation formats Show less citations formats

Note that from the first issue of 2016, MDPI journals use article numbers instead of page numbers. See further details here.

Related Articles

Article Metrics

Article Access Statistics



[Return to top]
Axioms EISSN 2075-1680 Published by MDPI AG, Basel, Switzerland RSS E-Mail Table of Contents Alert
Back to Top