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A Test of Real Options Logic

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Author Info
Bernadette Power
Gavin C. Reid

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Abstract

The main hypothesis examines whether real options logic is applied by entrepreneurs in undertaking key organisational change (e.g. ownership, technology, location, line of business etc.). This is explored in a model of firm performance using data collected in face-to-face interviews with entrepreneurs on the level and timing of precipitating influences of organisational change and the level and timing of consequential adjustments following organisational change. Two econometric estimation techniques (e.g. Box-Cox regression with WLS correction and Heckman sample selectivity correction) were employed. Firm performance is explained in terms of a count of real options exercised, measures of the level and timing of precipitators and consequential adjustments, plus interactions between these measures to capture firm behaviour through a real options lens. Evidence was found of the value of holding real options until uncertainties are resolved. At this point the value of waiting is at its lowest

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Publisher Info
Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 0509.

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Date of creation: Jun 2005
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Handle: RePEc:san:crieff:0509

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Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
Phone: 01334 462420
Web page: http://www.st-and.ac.uk/%7Ewww_crieff/discpaps.html

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Related research
Keywords: Real Options; Strategic Flexibility; Performance; Small Firms;

Find related papers by JEL classification:
C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
C42 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Survey Methods
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
M13 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - New Firms; Startups
M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics

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References listed on IDEAS
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. Bernadette Power & Gavin Reid, 2005. "Flexibility, Firm-Specific Turbulence and the Performance of the Long-lived Small Firm," Review of Industrial Organization, Springer, vol. 26(4), pages 415-443, 06. [Downloadable!] (restricted)
  2. Toshinobu Matsuda, 2005. "Differential Demand Systems: A Further Look at Barten's Synthesis," Southern Economic Journal, Southern Economic Association, vol. 71(3), pages 607-619, January.
  3. Nicholas Bloom & John Van Reenen, 2002. "Patents, Real Options and Firm Performance," Economic Journal, Royal Economic Society, vol. 112(478), pages C97-C116, March. [Downloadable!] (restricted)
  4. Enrico Santarelli & Francesca Lotti, 2005. "The Survival of Family Firms: The Importance of Control and Family Ties," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 12(2), pages 183-192, July. [Downloadable!] (restricted)
    Other versions:
  5. Fotopoulos, Georgios & Louri, Helen, 2000. " Location and Survival of New Entry," Small Business Economics, Springer, vol. 14(4), pages 311-21, June. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, 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. Simon C. Parker & Yacine Belghitar, 2006. "What Happens to Nascent Entrepreneurs? An Econometric Analysis of the PSED," Small Business Economics, Springer, vol. 27(1), pages 81-101, August. [Downloadable!] (restricted)
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