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Organisational change and performance in long-lived small firms: a real options approach

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  • Bernadette Power
  • Gavin C. Reid
Abstract
This paper supports two key principles of real options reasoning: (a) the value of waiting and (b) the value of staging. It tests whether real options logic applies to small firms implementing significant changes (e.g. in technology) in a model of small firm performance, estimated on data collected by interviews with entrepreneurs. We found that to achieve a higher value by waiting, a delicate balance of precipitators of change against time until exercise is necessary (e.g. if there were just one or two precipitators, then waiting would certainly raise the value). Similarly, to achieve a higher value by staging, the entrepreneur needs to balance embedding against investment time. Thus, provided that investment time is less than 1ΒΌ years, we found that embedding will raise the value. Overall, this implies that strategic flexibility in investment decisions is necessary for good long-run performance of small firms.

Suggested Citation

  • Bernadette Power & Gavin C. Reid, 2013. "Organisational change and performance in long-lived small firms: a real options approach," The European Journal of Finance, Taylor & Francis Journals, vol. 19(7-8), pages 791-809, September.
    • Handle: RePEc:taf:eurjfi:v:19:y:2013:i:7-8:p:791-809
    DOI: 10.1080/1351847X.2012.670124
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