In this study, we develop implications of imperfect competition on the return distribution of strategic growth options. We integrate real option theory with a Cournot-Nash framework in which two firms choose output levels endogenously and may have investment-timing differences. Simulations show that traditional option variables are significant determinants for the moments of the return distribution. In addition, uncertain preemption may introduce discontinuities in the payoff of the option that increase skewness and kurtosis. When first-mover advantages are crucial and sustainable, investment-timing differences between competitors can result in bimodal return distributions, where the firm with the first-mover advantage has a high probability of generating high returns.

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ERIM Article Series (EAS)
Annals of Operations Research
Erasmus Research Institute of Management

Haanappel, H. T., & Smit, H. (2007). Return distributions of strategic growth options. In Annals of Operations Research (Vol. 151, pp. 57–80). doi:10.1007/s10479-006-0130-8