Innovation under ambiguity and risk.
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We explore the implications of ambiguity (Knightian uncertainty) and risk for innovation decisions through the lens of real options. Our hypotheses are supported by a real options model, and are based on a new risk- and outcome-independent measure of ambiguity. We expect ambiguity to decrease innovation investment, whereas risk should increase innovation investment. The latter prediction is also consistent with prior work. Empirically, we find a consistently significant negative effect of ambiguity on R&D investment, as well as on patents and citations. We also find a significant positive effect of risk on R&D, but the effect of risk on patents and citations is negative and significant, which suggests that in the face of higher risk firms may wait and delay patenting. The effect of ambiguity is more important for high tech firms, which invest heavily in research and in patenting, consistent with our intuition.
Ravid, S.A., Coiculescu, G. & Izhakian, Y.Y. (2019). Innovation under ambiguity and risk. Baruch College Zicklin School of Business Research Paper, No. 2019-08-07. Coiculescu, Gabriela and Izhakian, Yehuda (Yud) and Ravid, S. Abraham, Innovation under Ambiguity and Risk (July 30, 2019). Baruch College Zicklin School of Business Research Paper No. 2019-08-07, Available at SSRN: https://ssrn.com/abstract=3428896 or http://dx.doi.org/10.2139/ssrn.3428896
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