IDEAS home Printed from https://ideas.repec.org/a/cup/jfinqa/v39y2004i04p843-872_00.html
   My bibliography  Save this article

Risk Premia and Preemption in R&D Ventures

Author

Listed:
  • Garlappi, Lorenzo

Abstract

I analyze the impact of competition on the risk premia of R&D ventures engaged in a multiple-stage patent race with technical and market uncertainty. After solving in closed form for the case of a two-stage race in continuous time, I show that a firm's risk premium decreases as a consequence of technical progress and increases when a rival pulls ahead. Compared to the case where firms collude, R&D competition erodes the option value to mothball a project, reduces the completion time and the failure rate of R&D, and causes higher and more volatile risk premia. Numerical simulations reveal that competition can generate risk premia up to 500 annual basis points higher and up to three times more volatility than in a collusive industry.

Suggested Citation

  • Garlappi, Lorenzo, 2004. "Risk Premia and Preemption in R&D Ventures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(4), pages 843-872, December.
    • Handle: RePEc:cup:jfinqa:v:39:y:2004:i:04:p:843-872_00
    as

    Download full text from publisher

    File URL: https://www.cambridge.org/core/product/identifier/S0022109000003239/type/journal_article
    File Function: link to article abstract page
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Azevedo, Alcino & Paxson, Dean, 2014. "Developing real option game models," European Journal of Operational Research, Elsevier, vol. 237(3), pages 909-920.
    2. Dockner, Engelbert J. & Siyahhan, Baran, 2015. "Value and risk dynamics over the innovation cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 61(C), pages 1-16.
    3. Faninam, Farzan, 2023. "The Impact of Multiple Investment Opportunities on the Initial Investment," Other publications TiSEM 86ec19ad-bd36-470a-88c7-4, Tilburg University, School of Economics and Management.
    4. Bustamante, Maria Cecilia, 2011. "Strategic investment, industry concentration and the cross section of returns," LSE Research Online Documents on Economics 37454, London School of Economics and Political Science, LSE Library.
    5. Yang, Bao & Chou, Hsin-I. & Zhao, Jing, 2020. "Innovation or dividend payout: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 68(C), pages 180-203.
    6. M. Cecilia Bustamante & Andres Donangelo, 2017. "Product Market Competition and Industry Returns," The Review of Financial Studies, Society for Financial Studies, vol. 30(12), pages 4216-4266.
    7. Dou, Winston Wei & Ji, Yan & Wu, Wei, 2021. "Competition, profitability, and discount rates," Journal of Financial Economics, Elsevier, vol. 140(2), pages 582-620.
    8. Moritzen, Mark Raun & Schandlbauer, Alexander, 2020. "The impact of competition and time-to-finance on corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 65(C).
    9. Bustamante, Maria Cecilia & Donangelo, Andrés, 2014. "Product market competition and industry returns," LSE Research Online Documents on Economics 119031, London School of Economics and Political Science, LSE Library.
    10. Meng, Rujing, 2008. "A patent race in a real options setting: Investment strategy, valuation, CAPM beta, and return volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 32(10), pages 3192-3217, October.
    11. Faninam, Farzan & Huisman, Kuno & Kort, Peter M. & Vera, J.C., 2023. "Real Options Models without Single-Investment Threshold Behavior," Discussion Paper 2023-029, Tilburg University, Center for Economic Research.
    12. Borisova, Ginka & Brown, James R., 2013. "R&D sensitivity to asset sale proceeds: New evidence on financing constraints and intangible investment," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 159-173.
    13. Faninam, Farzan, 2024. "Essays on real options : Triopoly dynamics, disconnected investment regions, and multiple investment options," Other publications TiSEM cccc1cad-2899-4b57-9d83-f, Tilburg University, School of Economics and Management.
    14. Faninam, Farzan, 2023. "The Impact of Multiple Investment Opportunities on the Initial Investment," Discussion Paper 2023-030, Tilburg University, Center for Economic Research.
    15. Kamoto, Shinsuke, 2015. "Strategic capacity expansion under a potential entry threat," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 157-177.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:39:y:2004:i:04:p:843-872_00. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kirk Stebbing (email available below). General contact details of provider: https://www.cambridge.org/jfq .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.