Abstract
We view innovation investment as a real option and explore the implications of ambiguity (Knightian uncertainty) and risk for innovation decisions. Our analysis uses a risk measure and a new outcome-independent measure of ambiguity. We find a consistently significant negative effect of ambiguity on R&D, patents, and citations supporting our theoretical notion. We also find a significant positive effect of risk on R&D, but the effect of risk on patents and citations is negative and significant. The different nature of R&D investments versus patent investments and citations may explain this difference. Ambiguity matters more for high-tech firms, consistent with intuition.
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