A Cross-sectional Analysis of Firm Growth Options

Abstract

We estimate the present value of growth options (PVGO) for a sample of manufacturing firms. We find that a firm’s PVGO is positively related to the firm’s R&D, past sales growth, and cash flow volatility. We also find that firms with higher PVGO, and therefore higher irreversible investment opportunities, invest less. This suggests that on average delaying investment maximizes the value of a firm’s real options. We also examine the relationship between a firm’s PVGO and market structure. We find that firms in more concentrated industries with above median Q are more likely to have higher PVGO. Additionally, more diversified firms have lower PVGO. These results appear to be robust to a number of definitions and controls. JEL Classification: D24, G31

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Cite this paper

@inproceedings{Long2002ACA, title={A Cross-sectional Analysis of Firm Growth Options}, author={Michael S. Long and John K. Wald and Jingfeng Zhang}, year={2002} }