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Strategic technology adoption and hedging under incomplete markets

Markus Leippold and Jacob Stromberg

Journal of Banking & Finance, 2017, vol. 81, issue C, 181-199

Abstract: We investigate the implications of technological innovation and non-diversifiable risk on entrepreneurial entry and optimal portfolio choice. In a real options model where two risk-averse individuals strategically decide on technology adoption, we show that the impact of non-diversifiable risk on the option timing decision is ambiguous and depends on the frequency of technological change. Compared to the complete market case, non-diversifiable risk may accelerate or delay the optimal investment decision. Moreover, strategic considerations regarding technology adoption play a central role for the entrepreneur’s optimal portfolio choice in the presence of non-diversifiable risk.

Keywords: Real options; Incomplete markets; Technology adoption; Optimal portfolio choice; Hedging (search for similar items in EconPapers)
JEL-codes: G11 G31 E2 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:jbfina:v:81:y:2017:i:c:p:181-199