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http://hdl.handle.net/2451/27175
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| Title: | Investor Valuation of the Abandonment Option |
| Authors: | Berger, Philip
Ofek, Eli
Swary, Itzhak |
| Issue Date: | Jan-1995 |
| Series/Report no.: | FIN-94-014 |
| Abstract: | We investigate whether investors price and the real 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. We use both discounted analyst’ forecasts of future
earnings and industry-median cash flow multipliers to proxy for expected
going-concern cash flows, and we rely on prior literature to categorize
assets as more or less specialized. Using these measures, we find strong
support for the major empirical predictions of abandonment put option theory. |
| URI: | http://hdl.handle.net/2451/27175 |
| Appears in Collections: | Finance Working Papers
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