Value maximizing hurdle rates for R&D investment

George Blazenko and Andrey Pavlov

Economics of Innovation and New Technology, 2010, vol. 19, issue 8, 693-717

Abstract: We show that the value maximizing hurdle rate for research and development (R&D) investments among private firms operating in a market setting is less than for conventional investments despite the fact that R&D has development risk. Because development risk arises only during R&D, entrepreneurs control this risk by deferring or pursuing R&D depending upon profitability. This risk management moderates downside loss and encourages upside gain which increases the value attraction of R&D and decreases the value maximizing hurdle rate below that of conventional investment.

Keywords: R&D; hurdle rates; real options; Tobin's q (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1080/10438590903003631

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