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Copyright 2006 by Richard John Gentry This work is dedicated to my family.


Anytime someone embarks on a quest of this magnitude, it is the people around him that bear the disproportionate share of the difficulty. I have been working toward this PhD for 6 years. In that time, I have been fortunate enough to muster the support of some truly wonderful people. To begin with, this research would not have begun without the generous support of the Kauffman Foundation and the Public Utility Research Center.

Their support has helped me to fund this research, and their generosity resulted in a very detailed and complex paper to which I am proud to put my name.

Secondly, this work owes a great deal to the patience of my committee, in particular Wei Shen. Dr. Shen took me on as his student upon his arrival at the university either out of charity or simple need, but his strong support and never ending tolerance for my antics has helped me develop a fascination in research and a strong critical eye. I can only hope that I will serve as effectively as a mentor in the future to one who was as desperately in need as I was. Henry Tosi has been with me through the entire process, and he has never failed to offer his honest assessment of my progress, a rare and difficult thing to find in academics. Srikanth Paruchuri has generously offered his expertise to my work when it was probably beyond reasonable to ask him for any more assistance.

Heather Elms is also owed a great deal of thanks for soliciting my entry into the program, even after I told her I was not interested. Sanford Berg and Mark Jamison have been enthusiastic supporters of me and my career since before I began this program. Without their help and cheer, I would never have finished. In fact, much of the computer iv programming skills I have used in this project were learned while working for Dr. Berg and Dr. Jamison in the early years of my program. However, I take great pride in knowing that I will continue all of these relationships well into the future.

In addition to academic help, I have enjoyed the benefit of working with wonderful people at the university. From Mitzi Calvert who joyfully handles my whimsical and purposively naïve approach to university bureaucracy to the seemingly limitless joy that the people at the Public Utility Research Center express for my work, I can truly say I have been very lucky in my friends. I shall miss being able to bumble into their office for some laughs when I am stressed. I know that I make them laugh, but I hope that I can express to them effectively how wonderful it has been to have their support. I shall miss Cynthia Stehouwer, Edith Myrick, and Araceli Castaneda a great deal. I have enjoyed the collegial help of Nathan Podsakoff, who helped me deal with the drudgery that sometimes defines our work. Giorgia D’Allura and Irene de Pater have been wonderful friends and colleagues to me, and their friendship has helped me realize the scope and magnitude of the profession I am about to enter. Suzanne Taylor, J. B. Loane, Rhys Williams, Steven Leonard, Val Watson, and Chris Melley have been wonderful and supportive friends who never failed to provide me a refuge when I had forgotten what incredible people act like. Matthew Matsen, Matthew Wilson, and Troy Quast have provided indispensable help in my data collection and programming efforts.

Finally, however, I want to thank my parents and my brother. I do not know how I could have done this without their help. I have not a few faults, one of which is letting go of my temper and angst upon those I care about the most. In particular, I have been hard on my mother. Her dedication and strength in handling my personality through this

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people can achieve things such as this. The process of graduate school has been hard, almost debilitating at times. The hours and restrictions that I have placed on myself have cost me tremendously. At times, I have been unfair to myself, but my goal has always been clear. I was never going to allow this process to get the best of me, and I was always true to what I set out to do.

I entered this profession in spirit sitting in a campground with my parents outside of Ann Arbor, Michigan in 2000. I was unhappy with my job at Ford, and I did not want to work in a career like that. I wanted a profession like my father’s. I did not envy the money: only the time. I envied the time because I knew how important it was to me and my brother growing up. Without a profession which allowed me some freedom, I might never have the possibility to be as good a father to my children as he is to me: a happy man, a strong role model to his two sons, and powerful enough in will and character to ignore the irrelevant. While he is only human, it cannot be said that he does not inspire others try to be more.

Finally, I want to thank my brother. Nothing is more satisfying to me than going to Nicholas’s house. Being in a rarified world of academics can be very constraining and suffocating. It is my brother who knows me best and my brother who always knows what to say. He may not always know that he is doing it, but my brother has helped me keep my head through this process. Our exchanges are often short and seemingly meaningless, but I truly wish to be more like my brother. In the people who have truly mattered in this life, I find my brother and may it always be so.

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Real Options



Aspirations and Information

Aspiration Adaptation


Organizational Search


Real Options

Shadow Options

Performance equal to aspiration

Performance below aspiration

Performance above aspirations

Risk and Uncertainty


Survival Bias


Within Group Aspirations

Imitation and Option Behavior

Trait-based Imitation

vii Scope of Purchase

Option execution


Dependent Variables

Independent Variables

State Characteristics

Option Characteristics

Option uncertainty

Option value

Option similarity

Market Characteristics

Data Considerations


Hypotheses 1 and 2

Hypothesis 3

Hypothesis 4

Hypothesis 5

Hypothesis 6






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4-1 Option Uncertainty Measures

4-2 Option Value Measures

4-3 Option Similarity Measures

4-4 Market Characteristic Measures

5-1 Option data summary statistics

5-2 Market data summary statistics

5-3 Option by year data summary statistics

5-4 Market by year data summary statistics

5-5 Maximum likelihood estimates of the likelihood of option purchase

5-6 Poisson model of option acquisition

5-7 Maximum likelihood estimates of the likelihood of option purchase based on dissimilarity

5-8 Poisson estimation of the tendency to enter markets

5-9 Maximum likelihood estimates of the likelihood of market entry

5-10 Summary of results

A-1 Logit estimates of the likelihood of market entry

B-1 Maximum likelihood estimates of the likelihood of market entry with attainment discrepancy defined just in terms of market and option differences

B-2 Maximum likelihood estimates of the likelihood of market entry with attainment discrepancy defined just in terms of market differences

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1-1 The proposed theoretical model.

2-1 Expanded model of attainment discrepancy

3-1 Model of corporate decision process

3-2 Option behavior relative to attainment discrepancy

3-3 Prospect theory power curve.

4-1 Observed theoretical model

4-2 Delay behavior following option purchase.

5-1 Market competitor count by origin

5-2 Entry and exit graphs by origin

5-3 Relationship between attainment discrepancy and markets entered

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Chair: Wei Shen Major Department: Management Recent debates regarding theories of strategic decision making have attempted to limit the application of real options theory to only those decisions where uncertainty is exogenous and time horizons are fixed. Many projects in a corporate setting do not fit this exclusive definition, so real options theory must either be restricted to a particular context or expanded to accommodate these problems. Rather than restrict the theory, this paper tries to expand real options theory to incorporate managerial behavior and thus attempts to resolve the problems with real options theory. To do so, this dissertation incorporates aspiration theory into real options theory to develop a behaviorally based perspective of option identification, development, and execution. For an empirical context, this research used a subfield of the telecommunications industry from 1996 through 2004. The study separated competitors in this market into two subgroups to highlight behavioral differences between groups. To highlight the importance and dynamics of entrepreneurial market entry, this dissertation divided the industry into two

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firms considered. Rather than support within group differences, this study found aspirations have a consistent influence on option purchase and market entry. While the effects of aspiration differences appear homogenous across groups, some results suggest that firms imitate within these groups. In addition, the firms position relative to other firms in the industry influences its tendency to purchase options and enter markets.

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Since March and Simon (1958), organization researchers have sought concise, formal techniques to describe managerial decision making which explicitly incorporate the behavioral tendencies of the managers involved. One of the most difficult challenges in developing a theory that describes decision making is incorporating managerial perceptions of uncertainty. Environmental uncertainty unsettles the mental models managers use to frame the environment and complicates theorizing. To date, two approaches have emerged which hold promise for a more complete theory, institutional/learning theory and real options theory.

Institutional and learning theories are based on the observation that environmental uncertainty leads firms to imitate other firms (DiMaggio & Powell, 1983; Greve, 1998a;

Haveman, 1993; Henisz & Delios, 2001). When in an uncertain and changing environment, firms adjust for risk increases by following strategies which have already been attempted by competitor firms. Ultimately then, firms compensate for uncertainty by following similar strategies and gauging their success relative to their competitors.

These theories have found that external factors moderate the tendency for firms to borrow strategies from one another, one of which is performance relative to an internally defined aspiration level. Firms tend to change strategies as performance fluctuates around the aspiration (Greve, 2003a; Massini, Lewin, & Greve, 2005), a finding consistent with The Behavioral Theory of the Firm (Cyert & March, 1963). However, while learning and institutional theories have grown in theoretical importance and found empirical support, these theories do not offer a prescriptive assessment of the decision making process nor do they provide a basis for extending the theoretical domain to incorporate between-firm differences. For instance, while research shows that search behavior increases as performance falls below aspiration level, there are few studies to suggest that performance influences how the firm invests the results of search. Furthermore, while aspirations are defined both internally and externally, there have been no suggestions as yet for what managers can do to influence the process of their formation. Learning from performance feedback is an important theoretical domain, but it lacks formalization and the ability to describe incremental investments. Another recent development in the managerial decision making literature, real options theory, might provide a way to bridge these gaps.

Real options theory explicitly incorporates an investment’s uncertainty. The application of real options theory to corporate decision making provides scholars a concise way to devolve decisions into discrete packets. The theory provides a simple conceptual way to divide decisions into steps, each of which is an option or choice which can be ignored, deferred, or executed. The theory has its roots in the finance literature and provides the ability to frame decisions as discrete choices in much the same way as a financial option provide the holder with the ability to take discrete action. Real options theory has proven versatile enough for researchers to frame the minutest decisions or the grandest corporate scheme as a management choice similar to a financial option (Kogut, 1991; Kogut & Kulatilaka, 2001). Real options theory incorporates the risk and uncertainty associated with the decision, a property that is lost in traditional net present value analysis, and it has encouraged cross-disciplinary research in the literatures on economics (Dixit, 1992; Teisberg, 1993), finance (Trigeorgis, 1993) and management (McGrath, 1997).

However, while the theorizing of real options has grown to incorporate many different corporate strategies such as preempting market competitors (Miller & Folta,

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