Entry Timing and Option Value
AbstractEmphasis on first-mover advantages has led strategic management researchers to advocate speed as a key to competitiveness. By contrast, real option theory emphasizes the value of waiting when considering sunk investments under uncertainty. We revisit the strategy question of market entry timing in light of theoretical advances in real option theory. The potential for real option purchases to enhance firm value arises from market imperfections. Unlike financial option pricing theory, we allow for time-varying option valuation parameters. These time-varying parameters have implications for initial option purchase decisions as well as subsequent exercise timing. Recognizing the option value associated with maintaining strategic flexibility sets a higher threshold for exercising options than conventional analyses of investment timing might suggest. Optimal timing for exercising real options depends on current dividends, the possibility of preemption, and whether the option is proprietary or shared, simple or compound. A final section elaborates the implications of real option theory for strategy practice and research.
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Bibliographic InfoPaper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1121.
Length: 29 pages
Date of creation: Jul 1999
Date of revision:
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