Value and risk dynamics over the innovation cycle

Engelbert Dockner and Baran Siyahhan

Journal of Economic Dynamics and Control, 2015, vol. 61, issue C, 1-16

Abstract: This paper studies investment in intellectual capital and corresponding value and risk dynamics over the innovation cycle. We assume that the innovation cycle consists of three phases, R&D, trial, and market introduction phases. We use a real option investment model to characterize firm value and risk dynamics over the innovation cycle and find that firm value is the sum of the value of assets in place and non-linear option values related to breakthrough, exit, and market introduction options. Firm risk over the innovation cycle is highly non-linear and quite distinct in different phases. During the R&D phase risk is high as the firm faces high operating leverage originating from R&D fixed costs together with technological uncertainty. During the trial phase risk is significantly lower and dominated by option risk to launch the product in the market while after the introduction of the product in the market risk is equivalent to the asset risk of the company. Our model is consistent with the view that positive excess returns of R&D intensive firms are a compensation for risk. Based on this insight we derive several testable predictions.

Keywords: Intellectual capital; R&D; Firm risk; Real options (search for similar items in EconPapers)
JEL-codes: D24 G31 G39 J24 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Value and risk dynamics over the innovation cycle (2015)
Working Paper: Value and risk dynamics over the innovation cycle (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:61:y:2015:i:c:p:1-16

DOI: 10.1016/j.jedc.2015.07.005

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