Real Options Meet Organizational Theory: Coping with Path Dependencies, Agency Costs, and Organizational Form

Advances in Strategic Management, Volume 24, 333–361, 2007

29 Pages Posted: 29 May 2002 Last revised: 27 Jul 2012

See all articles by Russell Wayne Coff

Russell Wayne Coff

Wisconsin School of Business

Kevin Laverty

University of Washington, Bothell - Department of Management

Date Written: February 1, 2007

Abstract

Scholars have begun to recognize the importance of integrating organizational issues into real options theory. In doing so, some argue that options are inappropriate for evaluating critical strategic investments. In a more in-depth analysis, we argue that the organizational form that an option takes has a profound effect on exercise decisions. When options are initially integrated, organizational elements such as routines and culture become increasingly intertwined over time, raising the cost of abandoning the option – in effect, pushing firms to exercise options. In contrast, initially isolated options become idiosyncratic and more costly to integrate over time – pushing firms to kill them. There are also reputational and social capital effects that may bias exercise decisions beyond the mere consideration of costs, leading to escalation or missed opportunities.

Keywords: Real options, Core Competencies, Resource-based view, Knowledge

JEL Classification: M1, O31, O32, O33, O34

Suggested Citation

Coff, Russell Wayne and Laverty, Kevin, Real Options Meet Organizational Theory: Coping with Path Dependencies, Agency Costs, and Organizational Form (February 1, 2007). Advances in Strategic Management, Volume 24, 333–361, 2007, Available at SSRN: https://ssrn.com/abstract=311541 or http://dx.doi.org/10.2139/ssrn.311541

Russell Wayne Coff (Contact Author)

Wisconsin School of Business ( email )

975 University Avenue
Madison, WI 53706
United States

Kevin Laverty

University of Washington, Bothell - Department of Management ( email )

Box 358533, 18115 Campus Way NE
Bothell, WA 98011
United States
425-352-5338 (Phone)
425-352-5277 (Fax)

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