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Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long‐Run Performance
Author(s) -
CARLSON MURRAY,
FISHER ADLAI,
GIAMMARINO RON
Publication year - 2006
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2006.00865.x
Subject(s) - risk–return spectrum , financial economics , economics , capital asset pricing model , short run , asset (computer security) , investment (military) , event study , abnormal return , systematic risk , monetary economics , business , econometrics , finance , computer science , portfolio , paleontology , context (archaeology) , computer security , politics , law , political science , stock exchange , biology
We present a rational theory of SEOs that explains a pre‐issuance price run‐up, a negative announcement effect, and long‐run post‐issuance underperformance. When SEOs finance investment in a real options framework, expected returns decrease endogenously because growth options are converted into assets in place. Regardless of their risk, the new assets are less risky than the options they replace. Although both size and book‐to‐market effects are present, standard matching procedures fail to fully capture the dynamics of risk and expected return. We calibrate the model and show that it closely matches the primary features of SEO return dynamics.