Strategic growth option, uncertainty, and R&D investment

This paper investigates the effect of uncertainty on R&D investment. We find that firms invest more in R&D when they face higher uncertainty, as measured by idiosyncratic return volatility. We further show that the effect is more pronounced for firms in more competitive industries as well as for firms whose products have less market power. Overall, our findings support the theory of strategic growth option in which firms under competition follow preemptive strategy when they face high uncertainty.