Does the market correctly value investment options?

Evgeny Lyandres; Egor Matveyev; Alexei Zhdanov

doi:10.1093/rof/rfaa002

Does the market correctly value investment options?

Evgeny Lyandres, Egor Matveyev, Alexei Zhdanov

Finance

Research output: Contribution to journal › Article › peer-review

Abstract

This paper shows that the stock market misprices firms' investment options. We build a real options model of optimal investment under uncertainty to estimate the value of firms' investment options. We show that firms with valuable investment options have a higher likelihood of being mispriced. Importantly, this mispricing is not one-sided, as such firms are equally likely to be undervalued or overvalued. Our paper adds to the debate on whether public equity markets are myopic and systematically undervalue innovative firms. We show that this is not necessarily the case.

Original language	English (US)
Pages (from-to)	1159-1201
Number of pages	43
Journal	Review of Finance
Volume	24
Issue number	6
DOIs	https://doi.org/10.1093/rof/rfaa002
State	Published - Nov 1 2020

All Science Journal Classification (ASJC) codes

Accounting
Finance
Economics and Econometrics

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10.1093/rof/rfaa002

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@article{1dec3f7b34cb4a6ebcceb907ef319ba2,

title = "Does the market correctly value investment options?",

abstract = "This paper shows that the stock market misprices firms' investment options. We build a real options model of optimal investment under uncertainty to estimate the value of firms' investment options. We show that firms with valuable investment options have a higher likelihood of being mispriced. Importantly, this mispricing is not one-sided, as such firms are equally likely to be undervalued or overvalued. Our paper adds to the debate on whether public equity markets are myopic and systematically undervalue innovative firms. We show that this is not necessarily the case.",

author = "Evgeny Lyandres and Egor Matveyev and Alexei Zhdanov",

note = "Funding Information: We thank Joel Peress (the Editor), two anonymous referees, Malcolm Baker, Hui Chen, Alexandre Corhay, Andrea Gamba, Alessandro Graniero, Dongmei Li, Juhani Linnainmaa, Dmitry Makarov, Andrey Malenko, Boris Nikolov, Dino Palazzo, Roberto Steri, Richard Thakor, Mihail Velikov, Adrien Verdelhan, Toni Whited, and seminar participants at Arizona State University, Boston University, George Mason University, Pennsylvania State University, University of Alberta, Universidad de los Andes, 2016 IDC Summer Finance Conference, 2016 Gerzensee ESSFM meetings, 2016 Moscow International Finance Conference, 2017 European Winter Finance Summit, 2017 ABFER CF Meetings, 2017 FIRS Conference, 2017 WFA Meetings, 2017 EFA Meetings, 2017 Oregon Summer Finance Conference, 2017 NFA Meetings, 2018 AFA Meetings, 2018 HEC-McGill Conference, 2018 Utah Winter Finance Conference, and 2018 BI Center for Asset Pricing Workshop for helpful comments. Previous versions of this paper were circulated under the title ?Misvaluation of Investment Options.?",

year = "2020",

month = nov,

day = "1",

doi = "10.1093/rof/rfaa002",

language = "English (US)",

volume = "24",

pages = "1159--1201",

journal = "Review of Finance",

issn = "1572-3097",