IDEAS home Printed from https://ideas.repec.org/a/bla/jfinan/v74y2019i2p845-898.html
   My bibliography  Save this article

Equity Misvaluation and Default Options

Author

Listed:
  • ASSAF EISDORFER
  • AMIT GOYAL
  • ALEXEI ZHDANOV

Abstract

We study whether default options are mispriced in equity values by employing a structural equity valuation model that explicitly takes into account the value of the option to default (or abandon the firm) and uses firm‐specific inputs. We implement our model on the entire cross section of stocks and identify both over‐ and underpriced equities. An investment strategy that buys undervalued stocks and shorts overvalued stocks generates an annual four‐factor alpha of about 11% for U.S. stocks. The model's performance is stronger for stocks with a higher value of the default option, such as distressed or highly volatile stocks.

Suggested Citation

  • Assaf Eisdorfer & Amit Goyal & Alexei Zhdanov, 2019. "Equity Misvaluation and Default Options," Journal of Finance, American Finance Association, vol. 74(2), pages 845-898, April.
    • Handle: RePEc:bla:jfinan:v:74:y:2019:i:2:p:845-898
    DOI: 10.1111/jofi.12748
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jofi.12748
    Download Restriction: no
    File URL: https://libkey.io/10.1111/jofi.12748?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Andreou, Christoforos K. & Lambertides, Neophytos & Panayides, Photis M., 2021. "Distress risk anomaly and misvaluation," The British Accounting Review, Elsevier, vol. 53(5).
    2. Nuno Silva & Pedro Dias Moreira, 2023. "On the forecasting power of corporate sales growth determinants," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    3. Barka, Zeineb & Hamza, Taher & Mrad, Senda, 2023. "Corporate ESG scores and equity market misvaluation: Toward ethical investor behavior," Economic Modelling, Elsevier, vol. 127(C).
    4. Bofinger, Yannik & Heyden, Kim J. & Rock, Björn, 2022. "Corporate social responsibility and market efficiency: Evidence from ESG and misvaluation measures," Journal of Banking & Finance, Elsevier, vol. 134(C).
    5. Yongli Li & Tianchen Wang & Baiqing Sun & Chao Liu, 2022. "Detecting the lead–lag effect in stock markets: definition, patterns, and investment strategies," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-36, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jfinan:v:74:y:2019:i:2:p:845-898. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/afaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.