A Value Premium Without Operating Leverage

16 Pages Posted: 30 Jun 2012 Last revised: 15 Oct 2012

See all articles by Graeme Guthrie

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

Date Written: October 15, 2012

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

JEL Classification: D92, G12, G31

Suggested Citation

Guthrie, Graeme, A Value Premium Without Operating Leverage (October 15, 2012). Available at SSRN: https://ssrn.com/abstract=2096144 or http://dx.doi.org/10.2139/ssrn.2096144

Graeme Guthrie (Contact Author)

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand
64 4 463 5763 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
100
Abstract Views
597
rank
269,776
PlumX Metrics