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Strategic Implications of Valuation: Evidence from Valuing Growth Options

Real Options Theory

ISBN: 978-0-7623-1427-0, eISBN: 978-1-84950-494-2

Publication date: 13 August 2007

Abstract

Strategy is ultimately aimed at creating shareholder value. We examine the relationship among intrinsic (DCF) value, market value, and the value of growth options using a “perfect foresight” model. Our findings suggest that Kester's (1984) initial assessment of growth option values may not hold under alternative valuation models. We highlight important issues in the valuation of growth options related to market expectations, modeling assumptions and estimation methods. The findings suggest that the firm's growth option value depends on three factors, each of which impacts investor expectations: (1) the macroeconomic environment; (2) the industry in which the firm participates; and (3) firm specific factors.

Citation

Alessandri, T.M., Lander, D.M. and Bettis, R.A. (2007), "Strategic Implications of Valuation: Evidence from Valuing Growth Options", Reuer, J.J. and Tong, T.W. (Ed.) Real Options Theory (Advances in Strategic Management, Vol. 24), Emerald Group Publishing Limited, Leeds, pp. 459-484. https://doi.org/10.1016/S0742-3322(07)24017-3

Publisher

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Emerald Group Publishing Limited

Copyright © 2007, Emerald Group Publishing Limited