Portfolio effect in real options: The case of equity alliances in biotechnolog

VASSOLO, R. S.; ANAND, J.; FOLTA, T.

Strategic Management Journal

Wiley

Año: 2004 vol. 25 p. 1045 - 1061

Firms invest in exploration-oriented activities to seek competitive advantage   and in response to changing environments. Real options formulations represent an emerging strand of thinking on such investments.  In this paper we begin with the observations that firms often simultaneously invest in multiple explorations projects. We identify two sources of potential interactions among these real options investments. First, we investigate the effects of correlations between the outcomes in different options. Second, we analyze the effects of investments that are fungible across project options. We show that under different conditions multiple options can be sub-additive (due to redundancies in outcomes) or super-additive (due to fungible inputs). We test the implications of our model with data from the biotech industry and find supporting evidence. Our model and results have some interesting implications for the exploration literature and real options lens.