Technology Switch Option and the Market Value of the Firm: A Model and an Empirical Test
32 Pages Posted: 1 Aug 2005
Date Written: November 2003
Abstract
A correct assessment of the innovation activities is critical to firm performance. To this purpose, some authors have analyzed the relationship between innovation and firm's market value within a framework based on the real options theory. However, in these papers there is not an explicit modeling of the 'real options'. Our model of market value formally includes a technology switch option, which allows the firm to exchange one technology with another when it achieves a major innovation. The model also accounts for the stochastic nature of the innovation. We test the model on a panel of publicly traded British firms operating in different manufacturing industries. The results provide support to the claim that the stock market recognizes and evaluates a technology switch option.
Keywords: Innovation, real options, market value
JEL Classification: O3, G12
Suggested Citation: Suggested Citation
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