Corporate investments and growth options

Jeffrey J. Reuer and Tony W. Tong
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Jeffrey J. Reuer: Kenan-Flagler Business School, University of North Carolina, McColl Building, Chapel Hill, NC 27599, USA, Postal: Kenan-Flagler Business School, University of North Carolina, McColl Building, Chapel Hill, NC 27599, USA
Tony W. Tong: School of Management, State University of New York at Buffalo, Jacobs Management Center, Buffalo, NY 14260-4000, USA, Postal: School of Management, State University of New York at Buffalo, Jacobs Management Center, Buffalo, NY 14260-4000, USA

Managerial and Decision Economics, 2007, vol. 28, issue 8, pages 863-877

Abstract: Real options theory models certain corporate investments as investments in growth options, yet there is little direct evidence on whether firms actually capture growth option value from these investments. In the current paper, we attempt to bridge this empirical gap, and we also examine the conditions under which the growth option value embedded in such investments is enhanced. Results from a sample of manufacturing firms during 1989-2000 reveal that investments in research and development and joint venture (JV) investments contribute to firms' growth option values. We also show that, among JVs of different ownership structures, only minority JVs increase growth option value. Our findings affirm options theory's assertion that real options can help firms capture valuable upside opportunities, they highlight the value of examining contingencies that drive option value, and they also point to the challenges firms face in realizing the unique benefits the theory emphasizes. Copyright © 2007 John Wiley & Sons, Ltd.

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