A value premium without operating leverage

Graeme Guthrie

Finance Research Letters, 2013, vol. 10, issue 1, 1-11

Abstract: The existing real options literature explains the value premium as a consequence of either operating leverage raising risk in low-demand states or industry-wide investment lowering risk in high-demand states. This paper presents a simple model in which a value premium arises solely from capacity constraints. Profit is more sensitive to demand shocks when there is excess capacity, and the book-to-market ratio is high, than when capacity constraints bind, and the book-to-market ratio is low. The option to adjust capacity weakens the value premium arising from assets in place, but does not eliminate it for a wide range of parameters.

Keywords: Value premium; Real options; Capacity constraints; Operating leverage (search for similar items in EconPapers)
JEL-codes: D21 D92 G12 G31 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:10:y:2013:i:1:p:1-11

DOI: 10.1016/j.frl.2012.10.001

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