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Investor Valuation of the Abandonment Option: Empirical Evidence from UK Divestitures 1985-1991

Author

Listed:
  • Ephraim Clark
  • Magid Gadad
  • Patrick Rousseau

    (CERGAM - Centre d'Études et de Recherche en Gestion d'Aix-Marseille - AMU - Aix Marseille Université - UTLN - Université de Toulon)

Abstract

This paper looks at divestitures by 144 UK firms listed on the London Stock Exchange from 1985 to 1991 and investigates whether and how accurately investors price the firm’s option to abandon assets in exchange for their exit value. Theory prices this real option as an American style put and the model we test includes the major features of the abandonment option literature: stochastic firm value, stochastic exit value, intermediate cash flows and uncertain project life. It also includes random events that can short circuit the optimal timing of the divestiture and trigger abandonment prematurely. The empirical implications are that investors do price the abandonment option but that they price it imperfectly because the exit price is private information. There is evidence that the effects of the timing factor are accurately priced and that the probability of forced premature abandonment figures in the option pricing.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Ephraim Clark & Magid Gadad & Patrick Rousseau, 2010. "Investor Valuation of the Abandonment Option: Empirical Evidence from UK Divestitures 1985-1991," Post-Print hal-01847055, HAL.
    • Handle: RePEc:hal:journl:hal-01847055
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    Cited by:

    1. is not listed on IDEAS
    2. Sangcheol Song, 2014. "Entry mode irreversibility, host market uncertainty, and foreign subsidiary exits," Asia Pacific Journal of Management, Springer, vol. 31(2), pages 455-471, June.

    More about this item

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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