Ambiguity, Managerial Ability, and Growth Options

Abstract

This paper studies the role of ambiguity and managerial ability in firm growth options from the perspective of behavioural theory. We argue that managerial ability increases both the identification and exploitation of growth options opportunities, but ambiguity reduces strategic growth options value as a result of information incompleteness and non‐Bayesian behaviour. Using a dataset of all US‐listed firms, we test the joint effects of ambiguity and managerial ability on growth options value after controlling for standard determinants and endogeneity. The results indicate that ambiguity has a negative effect on growth options value, while ability has a positive effect. We also find that the negative association between ambiguity and growth options is less pronounced with higher managerial ability. These findings underscore the importance of firm heterogeneity in the identification, exercise, and management of strategic and innovative real options opportunities. The paper's contribution provides relevant management insights into the behavioural antecedents of real options at the firm level as well as highlights that managerial and behavioural characteristics are important determinants of growth options value.

The importance of managerial discretion on managerial ability–firm cash holding nexus

“…Contemporary literature also investigates the impact of managerial attributes on investment efficiency (Chen et al. , 2021), acquisitions performance (Doukas and Zhang, 2021), ambiguity–growth options nexus (Driouchi et al. , 2021), innovation performance (Lin et al.…”

“…Contemporary literature also investigates the impact of managerial attributes on investment efficiency (Chen et al, 2021), acquisitions performance (Doukas and Zhang, 2021), ambiguity-growth options nexus (Driouchi et al, 2021), innovation performance (Lin et al, 2021) [3]. For instance, Cornaggia et al (2017) show that the relationship between managerial ability and credit risk factors is relevant only in the case of high competition or financial distress.…”

The Effect of Managerial Ability on relationship between Risk Taking Ability of a Firm and its Financial Performance in Pakistan

“…How a firm perceives its potential risk and invests in risk management improves a firm's performance. Driouchi et al (2022) from the standpoint of behavioral theory, this research investigates the key role of uncertainty and executive management's ability in a company's growth potentials. According to the study, management competence enhances the discovery and exploitation of growth option chances; however, ambiguity reduces the strategic value of growth options owing to a lack of understanding and non-Bayesian behavior.…”

“…Internal variables such as managerial ability of a firm play quite an important role in determining the risk strategy of a firm. Thus, managerial abilities of a firm determine how hazardous risk strategy has to be implemented (Driouchi, Chen, Lyu, Bennett, & So, 2022). This research paper is thus significant in examining how managerial ability of a firm moderates the relationship between risk seeking and its performance in Pakistan.…”

The impact of operational delay on irreversible investment under Knightian uncertainty

“…In particular, many facets of investment and management problems are incorporated into their basic framework (see [2] and [9] for relatively recent and comprehensive reviews). As I pointed out, the impact of operational delay is underresearched but the impact of KU has gained traction on both the theoretical and empirical fronts ( [6]; [15]; [20]; [11]; [19]; [16] and [5] are just a limited sample).…”