On the Option Valuation of R&D Project Under Heterogeneous Information Arrival

In the real option framework, the arrival of heterogeneous information during R&D stages is modeled firstly as a doubly stochastic Poisson process (DSPP). The new product market introduction is considered as an American Perpetual option. Investment in R&D can be thought of as a compound option. This paper derive an analytic approximation valuation formula for the R&D option, and demonstrate that accounting for heterogeneous information arrival may reduce the pricing biases. This way, the gap between real option theory and the practice of decision making with respect to investment in R&D is diminished.