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Option value and entry timing

Option value and entry timing When facing uncertainty, firms entering new markets can make initial foothold investments rather than undertake large sunk investments. Such investments are real call option purchases. They offer management flexibility, but also raise questions about whether and when to increase commitments to new markets. We present an entry timing decision criterion and discuss its application to a variety of market entry situations. Optimal timing for exercising real options depends on current dividends, possibilities for preemption, and whether the option is simple or compound, proprietary or shared. Our analysis reveals critical assumptions and new theoretical insights regarding market entry timing. Copyright © 2002 John Wiley & Sons, Ltd. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Strategic Management Journal Wiley

Option value and entry timing

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References (25)

Publisher
Wiley
Copyright
Copyright © 2002 John Wiley & Sons, Ltd.
ISSN
0143-2095
eISSN
1097-0266
DOI
10.1002/smj.244
Publisher site
See Article on Publisher Site

Abstract

When facing uncertainty, firms entering new markets can make initial foothold investments rather than undertake large sunk investments. Such investments are real call option purchases. They offer management flexibility, but also raise questions about whether and when to increase commitments to new markets. We present an entry timing decision criterion and discuss its application to a variety of market entry situations. Optimal timing for exercising real options depends on current dividends, possibilities for preemption, and whether the option is simple or compound, proprietary or shared. Our analysis reveals critical assumptions and new theoretical insights regarding market entry timing. Copyright © 2002 John Wiley & Sons, Ltd.

Journal

Strategic Management Journal – Wiley

Published: Jul 1, 2002

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