CRIEFF Discussion Paper Number 0509

A Test of Real Options Logic

Bernadette Power (University College Cork) and Gavin C. Reid (University of St. Andrews)

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.

JEL Classifications
C21, C42, D21, G31, L25, M13, M21

Keywords
Real Options, Strategic Flexibility, Performance, Small Firms

Back to CRIEFF Discussion Papers list