Does the Market Correctly Value Investment Options?*

Evgeny Lyandres, Egor Matveyev and Alexei Zhdanov

Review of Finance, 2020, vol. 24, issue 6, 1159-1201

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.

Keywords: Valuation of investment options; Mispricing in public equity markets; Expected returns (search for similar items in EconPapers)
JEL-codes: G14 G32 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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