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Variance-enhancing corporate entrepreneurship under deregulation: An option portfolio approach

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Abstract

The current study draws upon the real option portfolio theory to examine the relationship between deregulation and corporate entrepreneurship. We propose that a firm could respond to deregulation with variance-enhancing corporate entrepreneurial activities (CEAs), which increase the portfolio value of real options to exploit the upside opportunities and constrain the downside loss. We develop two dimensions of CEAs—frequency and diversity—to capture the value of the option portfolio, and we propose that these two dimensions contribute to a company’s long-term equity return and innovation performance. We test these arguments with 526 Chinese listed firms in five innovative industries from 2001 to 2005, and we find significant support for our hypotheses. Our empirical findings and the option portfolio approach carry important implications for entrepreneurship theory and policy. The CEA portfolio could be a useful tool to configure and allocate strategic investments proactively.

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  1. Wind is a leading financial database provider in China. It gathers information on firms’ equity, funds, fixed-income, foreign exchange, insurance, futures, derivatives, commodities, the macro economy, and financial news.

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Acknowledgments

We are grateful to Seung-Hyun Lee and two reviewers for editorial guidance and Garry Bruton, Christopher Marquis, Kevin Au, Shaoming Zou, Bing Ren, and other conference participants for helpful comments. We also thank the support by the Bloch School Summer Research Fund at University of Missouri - Kansas City, the National Natural Science Foundation of China (No. 712022095; No. 71232009), the Guangdong Natural Science Foundation (No. S2012040007820), and the Fundamental Research Funds for the Central Universities (No. 13wkpy13).

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  1. Department of Global Entrepreneurship and Innovation, Henry W. Bloch School of Management, University of Missouri – Kansas City, 5100 Rockhill Road, Kansas City, MO, 64110-2499, USA

    Sunny Li Sun & Xiaoming Yang

  2. Sun Yat-Sen Business School, Sun Yat-sen University, Guangzhou, China

    Weiwen Li

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Sun, S.L., Yang, X. & Li, W. Variance-enhancing corporate entrepreneurship under deregulation: An option portfolio approach. Asia Pac J Manag 31, 733–761 (2014). https://doi.org/10.1007/s10490-014-9379-7

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