A Test of Real Options Logic

Bernadette Power and Gavin Reid

No 509, CRIEFF Discussion Papers from Centre for Research into Industry, Enterprise, Finance and the Firm

Abstract: The main hypothesis examines whether real options logic is applied by entrepreneurs in undertaking key organisational change (e.g. ownership, technology, location, line of business etc.). This is explored in a model of firm performance using data collected in face-to-face interviews with entrepreneurs on the level and timing of precipitating influences of organisational change and the level and timing of consequential adjustments following organisational change. Two econometric estimation techniques (e.g. Box-Cox regression with WLS correction and Heckman sample selectivity correction) were employed. Firm performance is explained in terms of a count of real options exercised, measures of the level and timing of precipitators and consequential adjustments, plus interactions between these measures to capture firm behaviour through a real options lens. Evidence was found of the value of holding real options until uncertainties are resolved. At this point the value of waiting is at its lowest

Keywords: Real Options; Strategic Flexibility; Performance; Small Firms (search for similar items in EconPapers)
JEL-codes: C21 C42 D21 G31 L25 M13 M21 (search for similar items in EconPapers)
Date: 2005-06
New Economics Papers: this item is included in nep-ent and nep-fin
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Citations: View citations in EconPapers (1)

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