Decision making for integrating a securities firm with a financial holding company: comparison between the NPV method and the binomial option approach

摘要

This study attempts to provide a foundation for decision making regarding integrating (merging) a securities firm with a financial holding company. Besides calculating the static value using the conventionally adopted net present value method, the potential value through strategic flexibility is also measured using a binomial option approach. This study obtains the following findings. First, based on evaluation with the net present value method, the securities firm should immediately be integrated with the financial holding company. However, the firm value may be underestimated by failing to consider strategic flexibility. Second, the integration should be delayed by using a binomial option approach. Third, the value of the securities firm increases with the range of options (available for consideration). Fourth, given variation in risk-free interest rate, firm value, strike price, time to maturity, and value volatility, the option value may influence the timing of firm decision making.