A Patent Race In A Real Options Setting: Investment Strategy, Valuation, Capm Beta, And Return Volatility

摘要

In this paper, we study financial properties of R&D intensive firms through a continuous-time real-options patent-race model. Numerical analysis in this study shows that intense competition drives a firm to invest more aggressively, which then pushes up its cost of capital and return volatility while introducing negative return correlation with its competitor. Furthermore, we find that a firm's position in competition has important impacts on its financial properties. For instance, a firm's cost of capital is a non-monotonic function of its relative position in the race. In addition, the relationship between cash flow uncertainty and investment can be negative when a firm is far ahead or far behind, or positive when firms are close in the race.