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Real Options, Product Market Competition, and Asset Returns
Author(s) -
AGUERREVERE FELIPE L.
Publication year - 2009
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.1540-6261.2009.01454.x
Subject(s) - competition (biology) , product market , asset (computer security) , economics , investment (military) , rate of return , business , product (mathematics) , value (mathematics) , microeconomics , monetary economics , industrial organization , finance , politics , computer science , political science , law , biology , incentive , machine learning , ecology , geometry , computer security , mathematics
We study how competition in the product market affects the link between firms' real investment decisions and their asset return dynamics. In our model, assets in place and growth options have different sensitivities to market wide uncertainty. The strategic behavior of market participants influences the relative importance of these components of firm value. We show that the relationship between the degree of competition and assets' expected rates of return varies with product market demand. When demand is low, firms in more competitive industries earn higher returns, whereas when demand is high firms in more concentrated industries earn higher returns.