Real Options and Firm Performance: An Empirical Study

The relative importance of industry and firm-level effects on firm performance has been a subject of discussion between the industrial organization economists and the strategic management scholars. This study shows that the key industry and business-specific factors identified in the industrial organization and strategic management literature are real options and the effects of these variables on firm performance can be explained in terms of real options embedded in the factors. The results show that there are significant relationships between the industry- and the firm-level factors and the real options' measures used. The findings therefore suggest that industry and business-specific determinants of firm performance have embedded real options. And that organization-specific factors are relatively more important than the industry factors, The results are confirmed using real options theory as the firm real options' measures account for more variance in firm performance measures when compared to industry real options' measures. The analysis should be useful to corporate managers or anyone interested in the determinants of firm performance and also to strategic management scholars.