Investigating the Effect of Real Options Resulting from investment opportunities on Stock Return

Subject Areas : Financial engineering

mostafa Heydari Haratemeh ¹ (Faculty of Economics, Islamic Azad University Naragh Branch)

Received: 2016-10-24 Accepted : 2016-12-25 Published : 2017-04-21

Keywords: Flexibility, P_VAR, Real options, investment opportunities,

Abstract :

In this study, evidence is presented  that  shows the positive stock return-volatility relationship at the firm level is due to firm's real options.   In the real options theory, it can be deduced:  A) that the positive stock return-volatility at the firm level for those firms with more real options is  much stronger and that the level of the sensitivity of the firm's stock return in response to the changes in the stock return volatility is significantly reduced due to the use of real options. B) that the positive relationship between stock return and return volatility at the firm level for companies that have investment opportunities are stronger. While, this relationship for asset-based companies is weaker.  In other words, the return – volatility relationship is stronger for newly established companies, small companies, companies with modern research and development and finally companies with high growth rates. C) that, the relationship between return – volatility for companies that have fewer restrictions and greater capabilities to better respond to uncertain demands (greater flexibility) are much stronger. In the real options models, managerial flexibility leads to greater firm's value convexity function.