IDEAS home Printed from https://ideas.repec.org/a/eee/finana/v19y2010i2p134-139.html
   My bibliography  Save this article

Exploring an efficient investment regime: The case of SP100 companies

Author

Listed:
  • Chang, Tsangyao
  • Kang, Shuchen
  • Chiang, Gengnan

Abstract

We explore whether there exists an efficient investment regime for a panel of SP100 companies over the period 1986-2007. We demonstrate that abnormal stock returns are related to corporate total assets growth rate (a proxy variable for exercising real investment options through contraction, abandonment or expansion), change in EPS (a proxy variable for the change in profitability after exercising investment options), and one-year lagged P/B ratio (a proxy variable for the value factor), conditional on one-year lagged market-to-book assets ratio (MBA ratio, a proxy variable for the level of investment opportunity). We utilize the panel smooth transition regression (PSTR) model to examine the threshold effect of one-year lagged MBA ratio on abnormal stock returns. We find that there exists an efficient investment regime between two threshold values of 0.4773 and 3.2728. Our results are robust to predict, approximately 74.42%, the movement direction of abnormal stock returns in year 2008. Therefore, the main contribution of this paper is that the CEOs of SP100 companies are able to exercise investment options to create value for their firms if their levels of the investment opportunity are in the efficient investment regime.

Suggested Citation

  • Chang, Tsangyao & Kang, Shuchen & Chiang, Gengnan, 2010. "Exploring an efficient investment regime: The case of SP100 companies," International Review of Financial Analysis, Elsevier, vol. 19(2), pages 134-139, March.
  • Handle: RePEc:eee:finana:v:19:y:2010:i:2:p:134-139
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1057-5219(10)00012-8
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Tuomo Vuolteenaho, 2002. "What Drives Firm-Level Stock Returns?," Journal of Finance, American Finance Association, vol. 57(1), pages 233-264, February.
    2. 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.
    3. Andrés González & Timo Teräsvirta & Dick van Dijk & Yukai Yang, 1910. "Panel Smooth Transition Regression Models," CREATES Research Papers 2017-36, Department of Economics and Business Economics, Aarhus University.
    4. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, pages 345-368.
    5. Christopher W. Anderson & Luis Garcia-Feijão, 2006. "Empirical Evidence on Capital Investment, Growth Options, and Security Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 171-194, February.
    6. Michael J. Cooper & Huseyin Gulen & Michael J. Schill, 2008. "Asset Growth and the Cross-Section of Stock Returns," Journal of Finance, American Finance Association, vol. 63(4), pages 1609-1651, August.
    7. Chen, Peter & Zhang, Guochang, 2007. "How do accounting variables explain stock price movements? Theory and evidence," Journal of Accounting and Economics, Elsevier, pages 219-244.
    8. repec:bla:joares:v:38:y:2000:i:2:p:271-295 is not listed on IDEAS
    9. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, pages 147-175.
    Full references (including those not matched with items on IDEAS)

    Citations

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


    Cited by:

    1. Joe-Ming Lee & Ku-Hsieh Chen & Jying-Nan Wang, 2016. "The Relation Between Bond Fund Investor Flows And Volatility," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(05), pages 1-13, December.

    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:eee:finana:v:19:y:2010:i:2:p:134-139. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/620166 .

    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.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with 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 profile, as there may be some citations waiting for confirmation.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.