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The derivation of R&D return indicators within a real options framework

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Abstract:

The purpose of this paper is to rework the building blocks of real option applications and to introduce a basket option framework. We find that the characteristic parameters of the risk neutral density function implied in observed share prices within the real option framework represent a novel category of R&D return indicators. Empirical evidence for a set of 13 US bio-pharmaceutical companies is provided. The novel R&D return indicator can be used to analyse investor's expectations on R&D success of a particular firm. The implications of this indicator on decision making are mainly based on its information content on technological and market risk of the products under development in a particular firm. A proposal for a potential application of the stability index in innovation research is discussed as well. The study thus is at the interface between innovation research and (empirical) finance.

Document Type: Research Article

DOI: http://dx.doi.org/10.1111/1467-9310.00300

Affiliations: Fraunhofer Institute for Systems and Innovation Research, Karlsruhe, Germany

Publication date: June 1, 2003

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