The derivation of R&D return indicators within a real options framework
Authors: Wörner, Stefan D.; Grupp, Hariolf
Source: R&D Management, Volume 33, Number 3, June 2003 , pp. 313-325(13)
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
Affiliations: Fraunhofer Institute for Systems and Innovation Research, Karlsruhe, Germany
Publication date: June 1, 2003