Return distributions of strategic growth options |
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Authors: | Hans Haanappel Han Smit |
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Institution: | (1) Erasmus Research Institute of Management, Erasmus University, Rotterdam, The Netherlands;(2) Room H14.21, Burgemeester Oudlaan 50, 3062 PA Rotterdam, The Netherlands |
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Abstract: | In this study, we develop implications of imperfect competition on the return distribution of strategic growth options. We
integrate real option theory with a Cournot-Nash framework in which two firms choose output levels endogenously and may have
investment-timing differences. Simulations show that traditional option variables are significant determinants for the moments
of the return distribution. In addition, uncertain preemption may introduce discontinuities in the payoff of the option that
increase skewness and kurtosis. When first-mover advantages are crucial and sustainable, investment-timing differences between
competitors can result in bimodal return distributions, where the firm with the first-mover advantage has a high probability
of generating high returns.
The authors are greatly indebted to the editor, the seminar participants of the Real Option Conference 2003 and the anonymous
reviewers for their insightful comments and guidance. All remaining errors are our own. |
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Keywords: | Real options Game theory Asset returns |
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