Department of Economics and Business Economics

Value and risk dynamics over the innovation cycle

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  • Engelbert J. Dockner, WU Vienna University of Economics and Business
  • ,
  • Baran Siyahhan

This paper studies investment in intellectual capital and corresponding value and risk dynamics over the innovation cycle. We assume that the innovation cycle consists of three phases, R&D, trial, and market introduction phases. We use a real option investment model to characterize firm value and risk dynamics over the innovation cycle and find that firm value is the sum of the value of assets in place and non-linear option values related to breakthrough, exit, and market introduction options. Firm risk over the innovation cycle is highly non-linear and quite distinct in different phases. During the R&D phase risk is high as the firm faces high operating leverage originating from R&D fixed costs together with technological uncertainty. During the trial phase risk is significantly lower and dominated by option risk to launch the product in the market while after the introduction of the product in the market risk is equivalent to the asset risk of the company. Our model is consistent with the view that positive excess returns of R&D intensive firms are a compensation for risk. Based on this insight we derive several testable predictions.

Original languageEnglish
JournalJournal of Economic Dynamics and Control
Volume61
Pages (from-to)1-16
Number of pages16
ISSN0165-1889
DOIs
Publication statusPublished - 1 Dec 2015

    Research areas

  • Firm risk, Intellectual capital, R&D, Real options

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