An empirical evaluation of option pricing in intellectual capital

Date01 September 2003
Published date01 September 2003
DOIhttps://doi.org/10.1108/14691930310487824
Pages382-395
AuthorSanjoy Bose,Kok‐Boon Oh
Subject MatterAccounting & finance,HR & organizational behaviour,Information & knowledge management
An empirical evaluation of
option pricing in intellectual
capital
Sanjoy Bose and Kok-Boon Oh
Graduate School of Management, La Trobe University, Bundoora,
Victoria, Australia
Keywords Intellectual property, Assets valuation
Abstract The investments in intellectual capital by firms in the knowledge economy are a critical
driver for growth, profitability and competitiveness. This paper reviews the basic option-pricing
models for pricing financial instruments and evaluates their characteristics in relation to their
applicability to intellectual property, focusing on two distinct characteristics, i.e. past decisions that
influence future technological options, and the inherent uncertainty over future innovation
opportunities. The findings in this study include the discovery and confirmation of certain financial
characteristics that are important for the successful implementation of the option-pricing
methodology in high technology financial planning and management. This paper attempts to
summarise the current strand of literature pertaining to the use of option pricing in the intellectual
capital-intensive sector by evaluating their strengths and weaknesses, and make recommendations
as to how they can be effectively addressed to produce better results in the valuation process.
Introduction
The knowledge economy promotes innovation and provides the foundation
for accelerated economic growth in the twenty-first century and is an
important driver of technological development that restructures the
industrial economy towards the new economy. The accelerated rate of
economic growth has modified the traditional structure and institutional
basis of the economy and this has been accompanied by by-products of
fundamental consequence such as globalisation, the emergence of the
knowledge economy, and regional convergences and divergences of
economic growth of different countries (Islam et al., 2001; Sheehan and
Tegart, 1998). A rapidly changing economy, in which knowledge plays an
increasingly important role in restructuring economic activities resulting in
strong non-inflationary growth, robust stock market valuations and low
unemployment, is evidence of economic progress.
In the knowledge economy, intellectual capital has emerged as the key to a
firm’s ability to acquire and utilise knowledge-based assets (Bontis, 1999, 2002).
Crucial to the process of such acquisitions are capital investments that must be
made on a continuous basis. However, the evaluation process for investments
in intellectual capital, particularly their valuation, is both difficult and complex.
Nevertheless, valuation of intellectual assets is a fundamental necessity for
business investments to occur (Oh and Islam, 2001). Thus, we need tools to
The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at
http://www.emeraldinsight.com/researchregister http://www.emeraldinsight.com/1469-1930.htm
JIC
4,3
382
Journal of Intellectual Capital
Vol. 4 No. 3, 2003
pp. 382-395
qMCB UP Limited
1469-1930
DOI 10.1108/14691930310487824

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