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Value maximizing hurdle rates for R&D investment

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  • George Blazenko
  • Andrey Pavlov
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    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.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/10438590903003631
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Economics of Innovation and New Technology.

    Volume (Year): 19 (2010)
    Issue (Month): 8 ()
    Pages: 693-717

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    Handle: RePEc:taf:ecinnt:v:19:y:2010:i:8:p:693-717

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    Related research

    Keywords: R&D; hurdle rates; real options; Tobin's q;

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