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Delay of RD Investment,a Real Options Approach


  Using a real options approach,we investigate the investment decision problem of an R&D decision maker,focusing on the valuation of the R&D project and the optimal trigger to start investing in R&D.We find that there are two cases.In one case,the investment trigger for the R&D project is lower than the exercise trigger for the generated option.In the other case,the investment trigger for R&D is higher than the exercise trigger for the option,thus investment in the R&D project is delayed.We find a criterion that determines which scenario may happen.We find that the cost of investment and probability of success have a significant effect on determining whether the trigger for investment in R&D will be higher or lower than the exercise trigger for the option. When the investment trigger is too high,this may lead to an under-expenditure in R&D. These findings may help shed insight into why firms themselves may have reasons to have less expenditure in R&D than is socially optimal.……