Abstract
Real option theory predicts the inverse relation between uncertainty and corporate investment since investment is (at least partially) irreversible and uncertainty increases the value of option to wait. In contrast, strategic growth option framework shows that uncertainty may encourage investment in growth option because the value of option to wait is drastically eroded due to competition and an initial investment can confer greater capacity to take advantage of future growth opportunities. Consistent with the theory of strategic growth option, we document that firms will invest more in R&D when facing high idiosyncratic volatility. We further show that the switch of more R&D investment is more pronounced for firms in more competitive industries as well as for firms with less product market power. Our findings contribute to the literature on the effect of uncertainty on corporate investments by documenting that the preemptive strategy under competition is a main force that drives the positive relation between idiosyncratic volatility and R&D investment.
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