Does the Market Correctly Value Investment Options?

77 Pages Posted: 9 Aug 2016 Last revised: 17 Dec 2019

See all articles by Evgeny Lyandres

Evgeny Lyandres

Boston University

Egor Matveyev

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Alexei Zhdanov

Pennsylvania State University

Date Written: December 15, 2019

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: Misvaluation, Investment Options, Optimal Investment, Demand Uncertainty, Future Returns, Structural Estimation

JEL Classification: G14, G32

Suggested Citation

Lyandres, Evgeny and Matveyev, Egor and Zhdanov, Alexei, Does the Market Correctly Value Investment Options? (December 15, 2019). Available at SSRN: https://ssrn.com/abstract=2819652 or http://dx.doi.org/10.2139/ssrn.2819652

Evgeny Lyandres (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-3582279 (Phone)

Egor Matveyev

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-621
Cambridge, MA 02142
United States

Alexei Zhdanov

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

HOME PAGE: http://www.alexeizhdanov.com

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