Skip navigation

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.
Appears in Collections:Finance Working Papers

Files in This Item:
File Description SizeFormat 
wpa94014.pdf1.87 MBAdobe PDFView/Open

Items in FDA are protected by copyright, with all rights reserved, unless otherwise indicated.