Does the market correctly value investment options?

Evgeny Lyandres, Egor Matveyev, Alexei Zhdanov

Research output: Contribution to journalArticleResearchpeer-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 languageEnglish
Pages (from-to)1159-1201
Number of pages43
JournalReview of Finance
Volume24
Issue number6
DOIs
Publication statusPublished - Nov 2020
Externally publishedYes

Keywords

  • Expected returns
  • Mispricing in public equity markets
  • Valuation of investment options

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