Investor Valuation of the Abandonment Option

50 Pages Posted: 11 Nov 2008

See all articles by Philip G. Berger

Philip G. Berger

University of Chicago

Eli Ofek

New York University (NYU) - Department of Finance

Itzhak Swary

affiliation not provided to SSRN

Date Written: May 1995

Abstract

We investigate whether investors price the option to abandon the firm for its liquidation value. Theory prices this real option as an American put with both a stochastic strike price (liquidation value) and a stochastic value of the underlying security (the value of cash flows). The major empirical implications are that firm value increases in liquidation 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 relying on prior literature to categorize asset generalizability, we find strong support for abandonment option theory s predictions.

Suggested Citation

Berger, Philip G. and Ofek, Eli and Swary, Itzhak, Investor Valuation of the Abandonment Option (May 1995). NYU Working Paper No. FIN-95-010. Available at SSRN: https://ssrn.com/abstract=1298317

Philip G. Berger (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Eli Ofek

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Itzhak Swary

affiliation not provided to SSRN

No Address Available

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