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Does the Market Correctly Value Investment Options?

Author

Listed:
  • Evgeny Lyandres
  • Egor Matveyev
  • Alexei Zhdanov

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.

Suggested Citation

  • Evgeny Lyandres & Egor Matveyev & Alexei Zhdanov, 2020. "Does the Market Correctly Value Investment Options?," Review of Finance, European Finance Association, vol. 24(6), pages 1159-1201.
    • Handle: RePEc:oup:revfin:v:24:y:2020:i:6:p:1159-1201.
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    File URL: http://hdl.handle.net/10.1093/rof/rfaa002
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    Citations

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    Cited by:

    1. Rob Kim Marjerison & Chungil Chae & Shitong Li, 2021. "Investor Activity in Chinese Financial Institutions: A Precursor to Economic Sustainability," Sustainability, MDPI, vol. 13(21), pages 1-17, November.

    More about this item

    Keywords

    Valuation of investment options; Mispricing in public equity markets; Expected returns;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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