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Innovation Under Ambiguity and Risk

Published online by Cambridge University Press:  27 October 2023

Gabriela Coiculescu ,
Yehuda Izhakian  and
S. Abraham Ravid Open the ORCID record for S. Abraham Ravid [Opens in a new window]
Gabriela Coiculescu
Affiliation:
Yeshiva University Sy Syms School of Business [email protected]
Yehuda Izhakian
Affiliation:
Baruch College Zicklin School of Business [email protected]
S. Abraham Ravid*
Affiliation:
Yeshiva University Sy Syms School of Business
*
[email protected] (corresponding author)
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Abstract

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We view innovation investments as real options and explore the implications of risk (volatility) as well as a newly defined outcome independent measure of ambiguity (Knightian uncertainty) for innovation decisions. The empirical analysis uses stock returns to compute an implementable measure of ambiguity. We also control for risk and other determinants of innovation. We find a consistently significant negative effect of ambiguity on R&D, patents, and citations, as predicted. The effect of risk on R&D is positive and significant, but the corresponding effect on patents and citations is negative and significant. Ambiguity matters more for high-tech firms, consistent with intuition.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 40
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank the two anonymous referees and Jarrad Harford (the editor) for helpful comments and suggestions. We are indebted to Yakov Amihud, Tom Åstebro, Slava Fos, Elad Green, Shu Han, Deepak Hegde, Richard Herron, Joseph Kerstein, Andrey Malenko (discussant), James Ohlson, Joaquin Poblete, Alejandro Rivera, Eduardo Schwartz, Stephen Terry (discussant), Alex Vedrashko, Jaime Zender, and participants at the 2018 Midwest Finance Association Conference, the 2018 Northwestern (Searle Center) Conference on Innovation Economics, the 2019 Knut Wicksell Center Conference on Entrepreneurial Finance, the 2020 European Finance Association Meetings, the 2020 WEFI Seminar, as well as seminar participants at Ben Gurion University, HEC Paris, Hong Kong Poly, Lehigh University, Haifa University, Lund University, New York University, Simon Fraser University, KU Leuven, University of Glasgow, University of Massachusetts, and Yeshiva University, for helpful discussions and comments. Izhakian acknowledges hosting by the Stern School of Business, New York University. The usual disclaimer applies.

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