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A Real Options View of Corporate Venture Capital Investment Decisions: An Empirical Examination

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  • Li, Yong

    (U of Illinois at Urbana-Champaign)

  • Mahoney, Joseph T.

    (U of Illinois at Urbana-Champaign)

Abstract

This paper joins the strategic management research literature with the entrepreneurial research literature by developing a real options framework to explain and predict corporate venture capital investment decisions. Corporate venture capital is viewed as containing a series of real options. The initial investment opportunity is analogous to a call option to invest. Upon exercising the call option, the investing firm acquires two additional real options: the abandonment option in adverse market conditions and growth options in favorable market conditions. This paper proposes that established firms' propensity to make corporate venture capital investments are influenced by the factors that determine the economic value of the real options embedded in corporate venture capital projects. These real options value drivers include uncertainty, usage flexibility, growth potential and competition. Using a large sample of corporate venture capital investments during 1980-2004, this paper finds strong empirical support for a real options view of corporate venture capital investments.

Suggested Citation

  • Li, Yong & Mahoney, Joseph T., 2006. "A Real Options View of Corporate Venture Capital Investment Decisions: An Empirical Examination," Working Papers 06-0108, University of Illinois at Urbana-Champaign, College of Business.
    • Handle: RePEc:ecl:illbus:06-0108
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    Cited by:

    1. Vareska Van de Vrande & Wim Vanhaverbeke, 2013. "How Prior Corporate Venture Capital Investments Shape Technological Alliances: A Real Options Approach," Entrepreneurship Theory and Practice, , vol. 37(5), pages 1019-1043, September.
    2. Lanfang Wang & Susheng Wang, 2009. "Convertibles and milestones in staged financing," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 33(2), pages 189-221, April.
    3. Lin, Shu-Jou & Lee, Ji-Ren, 2011. "Configuring a corporate venturing portfolio to create growth value: Within-portfolio diversity and strategic linkage," Journal of Business Venturing, Elsevier, vol. 26(4), pages 489-503, July.
    4. Basu, Sandip & Phelps, Corey & Kotha, Suresh, 2011. "Towards understanding who makes corporate venture capital investments and why," Journal of Business Venturing, Elsevier, vol. 26(2), pages 153-171, March.

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