A Cross-sectional Analysis of Firm Growth Options

Department of Finance and Economics
Rutgers Business School – Newark and New Brunswick
Newark, NJ 07102-1820
November 5, 2002

AUTHORS:
Michael S. Long
John K. Wald
Jingfeng Zhang

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.

Keywords: real options, empirical valuation

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