Pilar Velasco
Universidad Autónoma de Madrid

Abstract:
This paper investigates the exercise of growth options within a diversification strategy. Taking the portfolio of businesses as the unit of analysis and considering the hedging role of growth options, we contend that the point at which a firm chooses whether to invest or not is determined by the risk characteristics of its diversified portfolio as a whole. We explain why and how such a point might depend on a firm’s diversification level, the volatility of its businesses, relatedness between segments, and rivalry in its core business. We find that a firm’s level of diversification and average volatility of its current businesses deter growth options exercise, whereas relatedness and rivalry in its core business trigger growth options exercise. Our portfolio perspective differs from the bulk of the literature on real options, which evaluates each growth option exercise in isolation, and contributes to furthering knowledge on the drivers behind diversification investments.

Please click here to register.

Venue
Department of Management, Economics and Industrial Engineering
Building B26/B – Room 0.1 – ground floor
Via Lambruschini 4/B, Milano