Firm and Industry Influences on the Value of Growth Options

Abstract

Strategy research on real options has emphasized the need to understand better the sources of the option value of the firm. We begin to address this issue by assessing the relative importance of firm versus industry influences on the value of firms' growth options. On the one hand, firms have been viewed as possessing distinct portfolios of real options, and firms vary in how they recognize and manage latent options. On the other hand, shared options exist that represent collective opportunities available to rivals, and their value can be affected by industry factors. Findings from variance decomposition analyses reveal that industry effects are important, yet firm effects always dominate; they are between 1.5 and 2.5 times as large as stable and transient industry effects combined. Thus, while shared options exist and industry conditions are important, it is the heterogeneity in firms' proprietary options and their differences in managing options that appear to matter the most in explaining the variance in the value that is captured from these options. We contribute to real options research by highlighting the implications of understanding proprietary and shared options and by extending extant research beyond its current decision-theoretic focus to begin to investigate the unique performance outcomes that real options theory ascribes to firms.

Keywords: Value of growth options, real options theory, variance decomposition, firm effects, industry effects