Value maximizing hurdle rates for R&D investment |
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| Authors: | George W Blazenko Andrey D Pavlov |
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| Institution: | 1. Faculty of Business Administration , Simon Fraser University , Vancouver, BC, Canada blazenko@sfu.ca;3. The Wharton School , University of Pennsylvania , Philadelphia, PA, USA |
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| Abstract: | We show that the value maximizing hurdle rate for research and development (R&D) investments among private firms operating in a market setting is less than for conventional investments despite the fact that R&D has development risk. Because development risk arises only during R&D, entrepreneurs control this risk by deferring or pursuing R&D depending upon profitability. This risk management moderates downside loss and encourages upside gain which increases the value attraction of R&D and decreases the value maximizing hurdle rate below that of conventional investment. |
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| Keywords: | R& D hurdle rates real options Tobin's q |
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