Corporate Investment Decisions and the Value of Growth Options

Recent applications of real options theory in strategy research have examined investment decisions framed as the purchase or exercise of particular options, but research has yet to offer direct evidence on whether firms actually capture option value from such investments. In this paper, we estimate the proportion of firm value accounted for by growth options and link the growth option value to corporate investments that have been commonly viewed as providing valuable growth options. The empirical analysis examines internal and external corporate development activities of a panel of 293 manufacturing firms during 1989-2000. The results indicate that investments in research and development and in joint ventures contribute to growth option value, and that investments in tangible capital and in acquisitions have no effect in general. Notably among equity joint ventures of various ownership levels, only minority joint ventures have significant effects.