Work

Investor valuation of the abandonment option

Year: 1996

Type: article

Abstract: We investigate whether investors price the option to abandon a firm at its exit value. Theory prices this real option as an American put with both a stochastic strike price (exit value) and a stochastic value of the underlying security (the value of cash flows). The empirical implications are that firm value increases in exit value, after controlling for expected going-concern cash flows, and that more generalizable assets produce more abandonment option value. Using discounted earnings forecasts to proxy for expected cash flows and prior literature to categorize asset generalizability, we find strong support for the predictions of abandonment option theory.

Source: Journal of Financial Economics

DOI: 10.1016/0304-405x(96)00877-x

Authors: Philip G. Berger, Eli Ofek, Itzhak Swary

Institutions: University of Chicago, University of Pennsylvania, New York University, Tel Aviv University

Language: English

Topic: Capital Investment and Risk Analysis

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: hybrid

Estimated APC paid: $4,740