Innovation under Ambiguity and Risk

We view innovation investment as a real option and explore the implications of ambiguity (Knightian uncertainty) and risk for innovation decisions. Our analysis uses a risk measure and a new outcome-independent measure of ambiguity. We find a consistently significant negative effect of ambiguity on R&D, patents, and citations supporting our theoretical notion. 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. The different nature of R&D investments versus patent investments and citations may explain this difference. Ambiguity matters more for high-tech firms, consistent with intuition.

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

JEL Classification: D81, G31, O31, O32

Suggested Citation: 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