, Volume 31, Issue 3, pp 733-761
Date: 01 May 2014

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.

Earlier versions of this manuscript were presented at “Entrepreneurship Research in the Context of Globalization” conference in Nankai University (June, 2013).