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A real options perspective on entrepreneurial entry in the face of uncertainty

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Author Info
Jonathan P. O'Brien (Krannert Graduate School of Management, Purdue University, West Lafayette, IN 47907-1310, USA)
Timothy B. Folta (Krannert Graduate School of Management, Purdue University, West Lafayette, IN 47907-1310, USA)
Douglas R. Johnson (Krannert Graduate School of Management, Purdue University, West Lafayette, IN 47907-1310, USA)
Abstract

In this paper we develop and test theory regarding whether entrepreneurs contemplating starting a new venture account for the value of the option to defer the entry decision. While others have illuminated the theoretical applicability of real options theory to entrepreneurship, empirical evidence in this context is lacking. Consistent with predictions derived from real options theory, we find that high uncertainty in the target industry dissuades entry, and that the irreversibility of the entry decision moderates this relationship. Furthermore, we find that the irreversibility of the investment decision can be influenced by industry-level, firm-level and even individual-level factors. Copyright © 2003 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/mde.1115
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Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 24 (2003)
Issue (Month): 8 ()
Pages: 515-533
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Handle: RePEc:wly:mgtdec:v:24:y:2003:i:8:p:515-533

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bates, Timothy, 1995. "Self-employment entry across industry groups," Journal of Business Venturing, Elsevier, vol. 10(2), pages 143-156, March. [Downloadable!] (restricted)
  2. Montgomery, Cynthia A. & Hariharan, S., 1991. "Diversified expansion by large established firms," Journal of Economic Behavior & Organization, Elsevier, vol. 15(1), pages 71-89, January. [Downloadable!] (restricted)
  3. Williamson, Oliver E, 1988. " Corporate Finance and Corporate Governance," Journal of Finance, American Finance Association, vol. 43(3), pages 567-91, July. [Downloadable!] (restricted)
  4. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June. [Downloadable!] (restricted)
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  5. Amit, Raphael & Muller, Eitan & Cockburn, Iain, 1995. "Opportunity costs and entrepreneurial activity," Journal of Business Venturing, Elsevier, vol. 10(2), pages 95-106, March. [Downloadable!] (restricted)
  6. Jaffe, Adam B & Trajtenberg, Manuel & Henderson, Rebecca, 1993. "Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 577-98, August. [Downloadable!] (restricted)
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  7. Douglas, Evan J. & Shepherd, Dean A., 2000. "Entrepreneurship as a utility maximizing response," Journal of Business Venturing, Elsevier, vol. 15(3), pages 231-251, May. [Downloadable!] (restricted)
  8. Steven R. Elliott, 1998. "Experiments in decision-making under risk and uncertainty: thinking outside the box," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(4-5), pages 239-257.
  9. Lambson, Val Eugene & Jensen, Farrell E, 1998. "Sunk Costs and Firm Value Variability: Theory and Evidence," American Economic Review, American Economic Association, vol. 88(1), pages 307-13, March. [Downloadable!] (restricted)
  10. Alan Carruth & Andy Dickerson & Andrew Henley, 1998. "What Do We Know About Investment Under Uncertainty?," Studies in Economics 9804, Department of Economics, University of Kent. [Downloadable!]
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  11. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April. [Downloadable!] (restricted)
  12. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August. [Downloadable!] (restricted)
  13. Price, Simon, 1995. "Aggregate Uncertainty, Capacity Utilization and Manufacturing Investment," Applied Economics, Taylor and Francis Journals, vol. 27(2), pages 147-54, February.
  14. Cooper, Arnold C. & Woo, Carolyn Y. & Dunkelberg, William C., 1988. "Entrepreneurs' perceived chances for success," Journal of Business Venturing, Elsevier, vol. 3(2), pages 97-108. [Downloadable!] (restricted)
  15. Geroski, P. A., 1995. "What do we know about entry?," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 421-440, December. [Downloadable!] (restricted)
  16. Tobias F. Rötheli, 1998. "Forecasting among alternative strategies in the management of uncertainty," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(3), pages 179-187.
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  1. Kostas Tsekouras & Dimitris Skuras & Irene Daskalopoulou, 2008. "The role of productive efficiency on entry and post-entry performance under different strategic orientation: the case of the Greek plastics and rubber industry," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 37-55. [Downloadable!]
  2. Ghosal, Vivek, 2007. "Small is Beautiful but Size Matters: The Asymmetric Impact of Uncertainty and Sunk Costs on Small and Large Businesses," MPRA Paper 5461, University Library of Munich, Germany. [Downloadable!]
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