Investor valuation of the abandonment option

Berger, Philip G.; Ofek, Eli; Swary, Itzhak

doi:10.1016/0304-405x(96)00877-x

Cited by 534 publications

(360 citation statements)

References 21 publications

Supporting

Mentioning

348

Contrasting

Unclassified

Order By: Relevance

“…Empirical support in favor of this idea has been provided by Pulvino (1998) for the airline industry, and especially by Acharya, Bharath, and Srinivasan (2007) who look at the entire universe of defaulted firms in the US over the period 1981 to 1999; see also Berger, Ofek, and Swary (1996) and Stromberg (2000). We adopt the definition of asset specificity that has been employed in the latter three papers: asset specificity is measured by the Book Value of Machinery and Equipment divided by the Book Value of Assets.…”

Section: Empirical Analysismentioning

confidence: 99%

Cross-country variations in capital structures: The role of bankruptcy codes

Acharya

Sundaram

John

2011

Journal of Financial Intermediation

114

View full text Add to dashboard Cite

We investigate the impact of bankruptcy codes on firms' capital-structure choices. We develop a theoretical model to identify how firm characteristics may interact with the bankruptcy code in determining optimal capital structures. A novel and sharp empirical implication emerges from this model: that the difference in leverage choices under a relatively equity-friendly bankruptcy code (such as the US's) and one that is relatively more debt-friendly (such as the UK's) should be a decreasing function of the anticipated liquidation value of the firm's assets. Using data on the US and the UK over the period 1990 to 2002, we subject this prediction to both parametric and nonparametric tests, using different proxies for liquidation values and different measures of leverage. In support for the theory, we find that our proxies for liquidation value are both statistically and economically significant in explaining leverage differences across the two countries. In contrast, many of the other factors that are known to affect within-country leverage (e.g., size) cannot explain differences in leverage across countries.

show abstract

Section: Empirical Analysismentioning

confidence: 99%

Cross-country variations in capital structures: The role of bankruptcy codes

Acharya

Sundaram

John

2011

Journal of Financial Intermediation

114

View full text Add to dashboard Cite

show abstract

“…In fact, Watts (2003) argues that an abandonment option is necessary to create demand for conservatism in an equity setting. 4 Our results could help explain the market structures of industries that have low entry threat, perhaps due to high entry barriers, but varied exit strategies.…”

Section: Introductionmentioning

confidence: 82%

“…Thus we predict liquidation value to be positively associated with all major dependent variables. 4 Empirical evidence also supports the use of accounting information in shareholders'abandonment decisions. Berger, Ofek, and Swary (1996) show that shareholders use balance sheet information to determine their abandonment option value, which is then integrated into the stock price.…”

Section: Introductionmentioning

confidence: 88%

“…4 Empirical evidence also supports the use of accounting information in shareholders'abandonment decisions. Berger, Ofek, and Swary (1996) show that shareholders use balance sheet information to determine their abandonment option value, which is then integrated into the stock price. Hayn (1995) …nds that the income statement information also re ‡ects shareholders'consideration for abandonment option.…”

Section: Introductionmentioning

confidence: 88%

See 1 more Smart Citation

Market Exit Through Divestment—The Effect of Accounting Bias on Competition

Chen

Jørgensen

2018

Management Science

View full text Add to dashboard Cite

We analyze the e¤ect of accounting bias on the competition and market structure of an industry. In our model, …rms'interim accounting reports on investment projects may contain bias introduced by the mandatory accounting system. We …nd that this bias strictly decreases …rms'pro…ts when investors do not have an abandonment option, but di¤erent results emerge when we allow the investors to divest in the interim. Speci…cally, a conservative accounting regime may increase the likelihood of projects being discontinued, inducing some …rms to exit from the product market and leaving rivals to capture their market share. A conservative regime can thus soften market competition and result in ex ante higher investment payo¤, higher consumer surplus, and higher total social welfare. Since industries often have common reporting standards, we also identify the degrees of industry-wide accounting bias that maximize the expected investor payo¤s. Finally, we allow for investors to coordinate their divestment decisions when both …rms report unfavorable costs and show an improvement to both …rm pro…ts and consumer surplus.

show abstract

“…The two differences are well explained by the absence of loss firms in our sample. Following the "Abandonment hypothesis" (Hayn, 1995;Berger et al, 1996;Bursgtahler and Dichev, 1997), firms with negative earnings are more likely to liquidate cease operations. In these types of firms, book value (acting as a proxy for liquidation value) will be the only relevant variable.…”

Section: Scale Effects In "Price-levels" Regressions (Us Data)mentioning

confidence: 99%

'Price-Levels' Regressions: 'Scale Effect' or 'Distribution Effect'?

Miralles

Veira

2006

SSRN Journal

View full text Add to dashboard Cite

Easton and Sommers (ES) (2003) document the existence of an overwhelming influence of large firms in 'price-levels' regressions on US data (as do Akbar and Stark (2003) on UK data). They refer to this overwhelming influence as the 'scale effect'. ES argue that the scale effect is caused by non-linearlities in the relationship between market value and the accounting variables. But non-linearities are only one possibility. We posit that the scale effect documented by ES is a pure econometric phenomenon. Typical variables used in Market-based Accounting Research (i.e. market value, book value, total assets, positive earnings, losses....) follow distributions that are very strong skewed, that is, distributions with a single, long tail. We argue that the scale effect is related to the presence of this large tail. When we apply a logarithmic transformation (as recommended by the literature in the case of highly skewed distributions, tending to restore normality), the 'scale effect' disappears. (2003) es un efecto puramente econométrico. Las variables comúnmente utilizadas en la investigación contable orientada hacia el mercados de capitales (por ejemplo, precio, fondos propios, beneficios, etc.) siguen distribuciones fuertemente asimétricas, esto es, distribuciones con una única cola muy alargada. A nuestro juicio, el efecto escala está relacionado con esta característica econométrica. Una vez aplicada una transformación logarítmica (tal y como recomienda la literatura en el caso de distribuciones asimétricas para restablecer normalidad), el efecto escala desaparece.

show abstract

Investor valuation of the abandonment option

Cited by 534 publications

References 21 publications

Cross-country variations in capital structures: The role of bankruptcy codes

Cross-country variations in capital structures: The role of bankruptcy codes

Market Exit Through Divestment—The Effect of Accounting Bias on Competition

'Price-Levels' Regressions: 'Scale Effect' or 'Distribution Effect'?

Contact Info

Product

Resources

About