Real Options and Investment Mode: Evidence from Corporate Venture Capital and Acquisition

Organization Science

36 Pages Posted: 1 Jan 2010

See all articles by Tony W. Tong

Tony W. Tong

University of Colorado at Boulder

Yong Li

University of Nevada Las Vegas


Existing research has utilized real options theory to analyze corporate venture capital (CVC) investment, yet little work has empirically studied such investment in a comparative setting. In this paper, we begin to address this gap by investigating firms’ investment mode choice between CVC and acquisition, which are alternative modes for external business development and corporate growth. We propose that when exogenous uncertainty elevates the value of real options, firms are more likely to undertake CVC investments rather than acquisitions. Furthermore, we suggest that the value of real options under uncertainty is contingent upon several factors, which may also shape firms’ choice between CVC and acquisition. Our empirical analyses model firms’ investment decision and investment mode choice simultaneously. The results indicate that market uncertainty is positively related to firms’ choice of CVC versus acquisition. In addition, investment irreversibility strengthens the effect of uncertainty, while growth opportunities surrounding the investment weaken the effect. Our empirical findings and the comparative approach we adopt to studying CVC investments and acquisitions have important implications for theory and research.

Keywords: Real options, investment mode choice, corporate venture capital, acquisition

Suggested Citation

Tong, Tony W. and Li, Yong, Real Options and Investment Mode: Evidence from Corporate Venture Capital and Acquisition. Organization Science, Available at SSRN:

Tony W. Tong

University of Colorado at Boulder ( email )

UCB 419
Boulder, CO 80309-0419
United States
303-492-8854 (Phone)
303-492-5962 (Fax)

Yong Li (Contact Author)

University of Nevada Las Vegas ( email )

4505 S. Maryland Parkway
Las Vegas, NV 89154
United States

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