Premium
Real options in equity partnerships
Author(s) -
Folta Timothy B.,
Miller Kent D.
Publication year - 2002
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.209
Subject(s) - equity (law) , rivalry , preemption , valuation (finance) , economics , option value , business , microeconomics , financial economics , industrial organization , finance , incentive , computer science , political science , law , operating system
We examine factors influencing the decision to acquire additional equity in partner firms in research‐intensive industries. This decision involves choosing between flexibility and commitment. Option theory motivates hypotheses regarding the effects of uncertainty, valuation of developing technologies, and the threat of preemptive rivalry. Our main hypothesis is that the resolution of uncertainty for high‐value technologies motivates commitment decisions. We also argue that when the underlying growth option is at risk of preemption by rivals, greater uncertainty encourages commitment. An event history model tests these hypotheses using data from minority investments in the biotechnology industry. Copyright © 2002 John Wiley & Sons, Ltd.