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The Investment Opportunity Set And Its Proxy Variables

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  • Tim Adam
  • Vidhan K. Goyal

Abstract

We use a real options approach to evaluate the performance of several proxy variables for a firm's investment opportunity set. The results show that, on a relative scale, the market-to-book assets ratio has the highest information content with respect to investment opportunities. Although both the market-to-book equity and the earnings-price ratios are related to investment opportunities, they do not contain information that is not already contained in the market-to-book assets ratio. Consistent with this finding, a common factor constructed from several proxy variables does not improve the performance of the market-to-book assets ratio. 2008 The Southern Finance Association and the Southwestern Finance Association.

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  • Tim Adam & Vidhan K. Goyal, 2008. "The Investment Opportunity Set And Its Proxy Variables," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 31(1), pages 41-63.
  • Handle: RePEc:bla:jfnres:v:31:y:2008:i:1:p:41-63
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    1. Alma Cohen & Liran Einav, 2007. "Estimating Risk Preferences from Deductible Choice," American Economic Review, American Economic Association, vol. 97(3), pages 745-788, June.
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