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Technology Switch Option and the Market Value of the Firm: A Model and an Empirical Test


Raffaele Oriani


Luiss Guido Carli University

November 2003


Abstract:     
A correct assessment of the innovation activities is critical to firm performance. To this purpose, some authors have analyzed the relationship between innovation and firm's market value within a framework based on the real options theory. However, in these papers there is not an explicit modeling of the 'real options'. Our model of market value formally includes a technology switch option, which allows the firm to exchange one technology with another when it achieves a major innovation. The model also accounts for the stochastic nature of the innovation. We test the model on a panel of publicly traded British firms operating in different manufacturing industries. The results provide support to the claim that the stock market recognizes and evaluates a technology switch option.

Number of Pages in PDF File: 32

Keywords: Innovation, real options, market value

JEL Classification: O3, G12

working papers series


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Date posted: August 1, 2005  

Suggested Citation

Oriani, Raffaele, Technology Switch Option and the Market Value of the Firm: A Model and an Empirical Test (November 2003). Available at SSRN: http://ssrn.com/abstract=763544 or http://dx.doi.org/10.2139/ssrn.763544

Contact Information

Raffaele Oriani (Contact Author)
Luiss Guido Carli University ( email )
Viale Romania, 32
Rome, 00196
Italy
+390685225908 (Phone)
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