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Return Predictability And The Real Option Value Of Segments, Pingui Rao, Heng Yue, Xin Zhou
Return Predictability And The Real Option Value Of Segments, Pingui Rao, Heng Yue, Xin Zhou
Research Collection School Of Accountancy
Theory suggests that firm value should include the value of real options; that is, firms have the option to expand more profitable businesses and liquidate less profitable businesses. In a diversified firm, each segment has its own real options. Applying real options theory to a diversified firm at the firm level neglects the value of segment-level options. If investors overlook segment-level options, mispricing will occur. Using data from 1981 to 2013, we find that a hedge portfolio buying diversified firms in the highest decile of the estimated real option value of segments (RVS) and selling those in the lowest RVS …