Corporate innovation and market value: a real options analysis test

Abstract

Recently, several questions have been raised about how the market capitalization of young technology firms an: determined. en:n as the\ continue to generate negative earnings. In this paper we present an empirical analysis of a real options valuation model of intangible assets. Using a sample or 245 Internet and biotech firms. we examine the determinants of growth opportunities or emerging firms. We show that the speed of innovation is a critical determinant or a firms market value. We also establish a differential impact of volatility on real growth options. In particular we find that the value of an at-the- money real growth option rises with higher volatility,where as the value of a deep in-the-money real growth option is less sensitive to volatility changes.