An empirical evaluation of option pricing in intellectual capital

Abstract

The investments in intellectual capital by firms in the knowledge economy are a critical driver for growth, profitability and competitiveness. This paper reviews the basic option‐pricing models for pricing financial instruments and evaluates their characteristics in relation to their applicability to intellectual property, focusing on two distinct characteristics, i.e. past decisions that influence future technological options, and the inherent uncertainty over future innovation opportunities. The findings in this study include the discovery and confirmation of certain financial characteristics that are important for the successful implementation of the option‐pricing methodology in high technology financial planning and management. This paper attempts to summarise the current strand of literature pertaining to the use of option pricing in the intellectual capital‐intensive sector by evaluating their strengths and weaknesses, and make recommendations as to how they can be effectively addressed to produce better results in the valuation process.

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