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Multi-stage product development with exploration, value-enhancing, preemptive and innovation options

Author

Listed:
  • Koussis, Nicos
  • Martzoukos, Spiros H.
  • Trigeorgis, Lenos

Abstract

We provide a real options framework for the analysis of product development that incorporates research and exploration actions, product attribute value-enhancing actions with uncertain outcome, as well as preemption and innovation options. We derive two-stage analytic formulas and propose a general multi-period solution using a numerical lattice approach. Our analysis reveals that exploration actions are more important when the project is out or at-the-money (near zero NPV) and less important for high project values. In a multi-stage setting, exploration actions are important even for in-the-money projects, when follow-on actions exist that can enhance the expected value of the project. With path-dependency, early actions are more valuable since they enhance the impact or reduce the cost of subsequent actions. Preemptive controls affecting rare event (jump) frequency and innovations that introduce positive jumps are more valuable for firms with higher frequency of competitive threats involving low volatility.

Suggested Citation

  • Koussis, Nicos & Martzoukos, Spiros H. & Trigeorgis, Lenos, 2013. "Multi-stage product development with exploration, value-enhancing, preemptive and innovation options," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 174-190.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:1:p:174-190
    DOI: 10.1016/j.jbankfin.2012.08.020
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:jbfina:v:81:y:2017:i:c:p:221-235 is not listed on IDEAS
    2. Chronopoulos, Michail & Lumbreras, Sara, 2017. "Optimal regime switching under risk aversion and uncertainty," European Journal of Operational Research, Elsevier, vol. 256(2), pages 543-555.
    3. Lukas, Elmar & Spengler, Thomas Stefan & Kupfer, Stefan & Kieckhäfer, Karsten, 2017. "When and how much to invest? Investment and capacity choice under product life cycle uncertainty," European Journal of Operational Research, Elsevier, vol. 260(3), pages 1105-1114.
    4. Koussis, Nicos & Martzoukos, Spiros H. & Trigeorgis, Lenos, 2017. "Corporate liquidity and dividend policy under uncertainty," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 200-214.
    5. repec:taf:eurjfi:v:23:y:2017:i:12:p:1150-1175 is not listed on IDEAS

    More about this item

    Keywords

    Real options; R&D; Technical risk; Path-dependency; Sequential-compound options; Jump-diffusion;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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