25 Years of Real Option Empirical Research in Management

• DOI: http://doi.org/10.1111/emre.12324
• Author: Keith D. Brouthers,Desislava Dikova,Edith Ipsmiller
• Published date: 01 March 2019
• Date: 01 March 2019

25 Years of Real Option Empirical Research

in Management

EDITH IPSMILLER,

1

KEITH D. BROUTHERS

2

and DESISLAVA DIKOVA

1

1

WU Vienna, Austria

2

King’s College London, UK

For several decades, management scholars have extolled the virtues of using real option logic when making

decisions under uncertainty. Real option logic suggests that in such situations, firms might be better off deferring

or staging investments, reducing potential financial losses, while at the same time securing an option to grow (or

abandon) the investment when uncertainty abates. Our analysis of the empirical research published in

leading management journals over the past 25 years suggests that while some progress has been made, much

more work needs to be done. We still do not have the answers to critical questions such as: Which

entrepreneurial/managerial traits impact the identification or exploitation of real options? Do multiple types of

uncertainties interact with each other and influence real option decisions? Addressing these and other issues

identified in our study can help improve our understanding of the usefulness of real option logic in management.

Keywords: literature review; strategic management; international management; real options theory

Introduction

Over the past 25 years,management scholars have applied

real option logic to a growing number of decisions

including investments in new technology (McGrath

and Nerkar, 2004), new international markets (Brouthers

et al., 2008) and entrepreneurial ventures (Folta et al.,

2010). The term ‘real option’was coined by Stewart

Myers (1977: 150), who argued that firms can be seen as

a combination of two types of assets, real assets and

real options, which Myers (1977: 150) defined as

‘opportunities to purchase real assets on possibly

favorable terms’. As opposed to financial options, which

constitute investments in financial instruments, real

options refer to investments in real property. Financial

options (the right to buy/sell some financial security in

the future) are obtained by making a small investment

when uncertainty is high. This small investment reduces

current resource commitments but gives the investor an

option to buy/sell the security at a specific price, at some

point in the future. Real option logic works in a similar

way (for a comparisonsee Mun, 2002 or Janney and Dess,

2004). Basically, real option logic suggests that when

making decisions in uncertain situations, firms can defer

investment or make a small investment. This way, they

can obtain an option to benefit from potential future

opportunitieswhile reducing current financialobligations,

thus lowering downside risk (McGrath, 1997; Janney and

Dess, 2004).

Since the theory’s introduction, different real option

methodologies have evolved. Whereas economists use

real option logic to calculate a real option value (referred

to as ‘real options valuation’), management scholars

typically apply ‘real options reasoning’, which uses real

option logic without calculating an option’svalue

(Driouchi and Bennett, 2012). Consequently, instead of

determining the value of a real option (often using Black

and Scholes models; see Dixit and Pindyck, 1994),

management researchers focus on its value drivers

(uncertainty and other variables).

Real option logic was developed to help managers

make better decisions when faced with uncertainty (Dixit

and Pindyck, 1994).To deal with uncertainty and provide

some protection from downside risk, real option logic

considers the flexibility managers have to adjust

investments in the future (Copeland and Keenan, 1998;

Krychowski and Quelin, 2010). Discounted cash flow

models do not recognize this flexibility and instead

assume firms make the full investment or make no

investment (Newton et al., 2004). Real option logic

suggests that under uncertainty, firms might want to take

Correspondence: Edith Ipsmiller, Institute for International Business,WU

Vienna, Welthandelsplatz 1, 1020 Vienna, Austria. E-mail: edith.

ipsmiller@wu.ac.at

European Management Review, Vol. 16, 55–68, (2019)

DOI: 10.1111/emre.12324

©2018 The Authors European Management Review published by John Wiley & Sons Ltd on behalf of European

Academy of Management (EURAM)

This is an open access articleunder the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and

distributionin any medium, provided the original work isproperly cited, theuse is non-commercial andno modifications or adaptationsare made.