Technology Switching Option and the Market Value of the Firm: A Model and an Empirical Test

Abstract

The valuation of innovation investments still poses several unresolved questions. Although some authors have analyzed these problems within a framework based on real options theory, their work has not explicitly tested the value of specific real options. The model of firm market value presented in this paper formally includes a technology switching option, which allows a firm to exchange an existing technology with a new technology. We test the model on a panel of publicly traded British firms operating in different manufacturing industries. The results provide support to the claim that the stock market recognizes and evaluates a technology switching option.

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