Innovation under Ambiguity and Risk

We view innovation investments as real options and explore the implications of risk (volatility)
as well as a newly defined outcome independent measure of ambiguity—Knightian uncertainty—
for innovation decisions. The empirical analysis uses stock returns to compute an
implementable measure of ambiguity. We also control for risk and other determinants of innovation.
We find a consistently significant negative effect of ambiguity on R&D, patents, and
citations, as predicted. The effect of risk on R&D is positive and significant, but the corresponding
effect on patents and citations is negative and significant. 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. Journal of Financial and Quantitative Analysis, Available at SSRN: https://ssrn.com/abstract=3428896 or http://dx.doi.org/10.2139/ssrn.3428896