Exploring an efficient investment regime: The case of SP100 companies
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.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andres Gonzalez & Timo Terasvirta & Dick van Dijk, 2005.
"Panel Smooth Transition Regression Models,"
Research Paper Series
165, Quantitative Finance Research Centre, University of Technology, Sydney.
- González, Andrés & Teräsvirta, Timo & van Dijk, Dick, 2005. "Panel Smooth Transition Regression Models," SSE/EFI Working Paper Series in Economics and Finance 604, Stockholm School of Economics.
- Tuomo Vuolteenaho, 2002. "What Drives Firm-Level Stock Returns?," Journal of Finance, American Finance Association, vol. 57(1), pages 233-264, 02.
- Hansen, Bruce E., 1999.
"Threshold effects in non-dynamic panels: Estimation, testing, and inference,"
Journal of Econometrics,
Elsevier, vol. 93(2), pages 345-368, December.
- Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
- Tom Doan, . "RATS programs to replicate Hansen's example of threshold break in panel data," Statistical Software Components RTZ00088, Boston College Department of Economics.
- Tom Doan, . "PANELTHRESH: RATS procedure to analyze up to two threshold breaks in a fixed effects panel model," Statistical Software Components RTS00152, Boston College Department of Economics.
- 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, 08.
- 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.
- Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
- 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, 02.
- Chen, Peter & Zhang, Guochang, 2007. "How do accounting variables explain stock price movements? Theory and evidence," Journal of Accounting and Economics, Elsevier, vol. 43(2-3), pages 219-244, July.
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: (Zhang, Lei)
If references are entirely missing, you can add them using this form.