Innovation under Ambiguity and Risk

49 Pages Posted: 2 Aug 2019 Last revised: 29 Aug 2019

See all articles by Gabriela Coiculescu

Gabriela Coiculescu

Yeshiva University - Syms School of Business

Yehuda (Yud) Izhakian

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

S. Abraham Ravid

Yeshiva University - Syms School of Business

Date Written: July 30, 2019

Abstract

We explore the implications of ambiguity (Knightian uncertainty) and risk for innovation decisions through the lens of real options. Our hypotheses are supported by a real options model, and are based on a new risk- and outcome-independent measure of ambiguity. We expect ambiguity to decrease innovation investment, whereas risk should increase innovation investment. The latter prediction is also consistent with prior work.

Empirically, we find a consistently significant negative effect of ambiguity on R&D investment, as well as on patents and citations. We also find a significant positive effect of risk on R&D, but the effect of risk on patents and citations is negative and significant, which suggests that in the face of higher risk firms may wait and delay patenting.

The effect of ambiguity is more important for high tech firms, which invest heavily in research and in patenting, consistent with our intuition.

Keywords: Ambiguity measurement, Ambiguity aversion, Risk aversion, Innovation, Patents

JEL Classification: C65, D81, D83, G13, G22, G30, G31, G39, O30, O32

Suggested Citation

Coiculescu, Gabriela and Izhakian, Yehuda (Yud) and Ravid, S. Abraham, Innovation under Ambiguity and Risk (July 30, 2019). Baruch College Zicklin School of Business Research Paper No. 2019-08-07. Available at SSRN: https://ssrn.com/abstract=3428896 or http://dx.doi.org/10.2139/ssrn.3428896

Gabriela Coiculescu

Yeshiva University - Syms School of Business ( email )

United States

Yehuda (Yud) Izhakian (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

HOME PAGE: http://people.stern.nyu.edu/yizhakia/

S. Abraham Ravid

Yeshiva University - Syms School of Business ( email )

United States

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