Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long‐Run Performance

210

138

We provide evidence that the positive relation between firm‐level stock returns and firm‐level return volatility is due to firms’ real options. Consistent with real option theory, we find that the positive volatility‐return relation is much stronger for firms with more real options and that the sensitivity of firm value to changes in volatility declines significantly after firms exercise their real options. We reconcile the evidence at the aggregate and firm levels by showing that the negative relation at the aggregate level may be due to aggregate market conditions that simultaneously affect both market returns and return volatility.

Section: Evolution Of the Return‐volatility Relation Around Real mentioning

confidence: 99%

Real Options, Volatility, and Stock Returns

Grullon

Lyandres

Zhdanov

2012

210

138

“…For clarity of exposition and without loss in generality, we consider a situation in which there are two potential acquirers, firm 1 and firm 2. Second, we assume that management has complete information regarding the potential benefits of the takeover, but cannot communicate this information to shareholders (as in Carlson et al (2006a) and Morellec and Zhdanov (2005)). Outside stockholders have imperfect information and decide to accept or reject takeover bids based on the informed managers' recommendation.…”

Section: The Timing and Terms Of Takeoversmentioning

confidence: 99%

“…2 2 From a modeling perspective, our paper also relates to the literature that analyzes asset pricing implications of corporate investment decisions using real options models [see, for example, Berk, Green, and Naik (2004), Carlson, Fisher, and Giammarino (2005, 2006a), Cooper (2006), or Zhang (2005)]. …”

mentioning

confidence: 99%

Stock Returns in Mergers and Acquisitions

Hackbarth¹,

Morellec

2008

194

This paper develops a real options framework to analyze the behavior of stock returns in mergers and acquisitions. In this framework, the timing and terms of takeovers are endogenous and result from value-maximizing decisions. The implications of the model for abnormal announcement returns are consistent with the available empirical evidence. In addition, the model generates new predictions regarding the dynamics of firm-level betas for the period surrounding control transactions. Using a sample of 1,086 takeovers of publicly traded U.S. firms between 1985 and 2002, we present new evidence on the dynamics of firm-level betas, which is strongly supportive of the model's predictions. Copyright (c) 2008 by The American Finance Association.

“…As noted, our modeling of debt dynamics follows Hennessy and Whited (2005), but we add aggregate shocks and asset pricing dynamics. And we contribute to investment‐based asset pricing (e.g., Cochrane (1991, 1996), Berk, Green, and Naik (1999), Carlson, Fisher, and Giammarino (2004, 2006), and Zhang (2005)) by studying the impact of debt dynamics on risk and expected returns 3…”

mentioning

confidence: 99%

Financially Constrained Stock Returns

Livdan¹,

Sapriza²,

Zhang

2009

215

More financially constrained firms are riskier and earn higher expected returns than less financially constrained firms, although this effect can be subsumed by size and book-to-market. Further, because the stochastic discount factor makes capital investment more procyclical, financial constraints are more binding in economic booms. These insights arise from two dynamic models. In Model 1, firms face dividend nonnegativity constraints without any access to external funds. In Model 2, firms can retain earnings, raise debt and equity, but face collateral constraints on debt capacity. Despite their diverse structures, the two models share largely similar predictions.