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

  • 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)

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    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
    Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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    1. 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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    13. 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.
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