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 |
---|---|
Pages (from-to) | 1159-1201 |
Number of pages | 43 |
Journal | Review of Finance |
Volume | 24 |
Issue number | 6 |
DOIs | |
State | Published - 1 Nov 2020 |
Externally published | Yes |
Keywords
- Expected returns
- Mispricing in public equity markets
- Valuation of investment options
All Science Journal Classification (ASJC) codes
- Accounting
- Finance
- Economics and Econometrics