Optimal Investment, Growth Options, and Security Returns

Jonathan B. Berk, Richard Green and Vasant Naik

Journal of Finance, 1999, vol. 54, issue 5, 1553-1607

Abstract: As a consequence of optimal investment choices, a firm's assets and growth options change in predictable ways. Using a dynamic model, we show that this imparts predictability to changes in a firm's systematic risk, and its expected return. Simulations show that the model simultaneously reproduces: (i) the time‐series relation between the book‐to‐market ratio and asset returns; (ii) the cross‐sectional relation between book‐to‐market, market value, and return; (iii) contrarian effects at short horizons; (iv) momentum effects at longer horizons; and (v) the inverse relation between interest rates and the market risk premium.

Date: 1999
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Citations: View citations in EconPapers (490)

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https://doi.org/10.1111/0022-1082.00161

Related works:
Working Paper: Optimal Investment, Growth Options, and Security Returns (1998)
Working Paper: Optimal Investment, Growth Options and Security Returns
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