There already exist several real option reviews/critiques in management (e.g., Adner and Levinthal, 2004 Newton et al., 2004 Ragozzino et al., 2016). First, we contribute to this work by undertaking a systematic method to review the literature. In this paper, we make a number of contributions to knowledge by reviewing the empirical real option research in top management journals over the past 25 years. In either case, the managerial flexibility provided by real option decision models enables firms to reduce downside risk while maintaining upside potential. This second approach is used when a small investment can provide access to proprietary information, affording the investing firm an opportunity to generate first mover advantages, close distribution channels to followers, restrict rivals' access to limited resources, or tie up potential partner organizations (Bowman and Hurry, 1993 Rivoli and Salorio, 1996). Taking an ‘invest and see’ approach means that firms will make a small initial investment and later make additional investments, abandon the investment, or continue to wait. In the ‘wait and see’ situation, managers initially defer investment and later make an investment, abandon the investment, or continue to wait. Real option logic suggests that under uncertainty, firms might want to take a ‘wait and see’ or an ‘invest and see’ approach (Dixit and Pindyck, 1994). 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). 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). Real option logic was developed to help managers make better decisions when faced with uncertainty (Dixit and Pindyck, 1994). 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). 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's value (Driouchi and Bennett, 2012). Since the theory's introduction, different real option methodologies have evolved. This way, they can obtain an option to benefit from potential future opportunities while reducing current financial obligations, thus lowering downside risk (McGrath, 1997 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. Real option logic works in a similar way (for a comparison see Mun, 2002 or Janney and Dess, 2004). 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. Financial options (the right to buy/sell some financial security in the future) are obtained by making a small investment when uncertainty is high. As opposed to financial options, which constitute investments in financial instruments, real options refer to investments in real property. 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’. 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).
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