A Real Option View Of The Optimal Investment Strategy Analysis Of Small Firm Creation

For a prospective entrepreneur who maximizes lifetime income, establishing a small firm is a high venture investment because of high asymmetry information during the creation process. It is important for the entrepreneur to evaluate the new firm dynamic and make right decision accordingly. The decision to set up a small firm is treated as an investment in an irreversible and risk project. An investment opportunity such as this can be assumed to be an opportunity but not an obligation, that is, a real option.This paper addresses the impact of the factors on the incentives to become self-employed. The model used here is an application of the model in McDonald and Siegel. The new approach here is that the cost of the new firm is the income from employment which is given up after creating new firm. The cost assumed to follow geometric Brownian motions. The optimal investment rule is found by contingent claims analysis. Comparative static is used to analyze the impact of the factors on the threshold.We can find that the optimal time to create a new small firm is when the ratio of income from the firm and from employment equals the threshold. Whether there is relationship between the two incomes, the total variance has a positive influence on the option value. But the respective volatility of income from employment and firm has ambiguous influence on the option value according to correlation coefficient and the ratio of .