Investigating the Effect of Real Options Resulting from Flexibility on Stock Return
Subject Areas : Financial Knowledge of Securities Analysis
mostafa Heidari Haratmeh
1
(Faculty member of Islamic Azad University, Naragh Branch.)
Shamsollah Shirinbakhsh
2
(Associate Professor, Department of Economics, Allameh Tabatabaei University.)
Keywords: Real options, investment opportunities, flexibility, Panel - Data,
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 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 . Thus, according to the theory of Jensen's inequality, sensitivity of the firm's value due to volatility in firm's underlying assets, while increasing, it should help to strengthen the company's flexibility to the changes in investment decisions and operations.
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