The investment opportunity set and its proxies
|dc.identifier.citation||Carson, G. (2005). The investment opportunity set and its proxies (Thesis). Retrieved from http://hdl.handle.net/10523/1385||en|
|dc.description.abstract||Myers (1977) describes the value of a firm as consisting of 2 things: assets in place and future investment options. He introduces the term 'Investment Opportunity Set' (IOS) to describe these options. In this paper, we have set out to identify the most appropriate proxy for the IOS using a range of single factor and multifactor techniques. Several recent studies do already use similar methods to examine the correlation between various proxies and an observable measure of the IOS over the following years (Kallapur and Trombley (1999), Baber, Janakiraman and Kang (1995), Adam and Goyal (2002)). The most common measure used previously for the IOS has been the future growth in the book value of the firm. This growth measures directly how the size of the firm in terms of book value increases, although it contains no information on how the market value of a firm is affected by future investments. This paper extends the existing literature by using a market-based measure for the IOS. Before starting it is important to define the IOS. Kallapur and Trombley (2001) define investment opportunities as options to invest in positive net present value (NPV) projects. They state that while some investment opportunities also result in an increase in the size of the firm, not all 'growth' opportunities have a positive NPV. Since all opportunities in the IOS have a positive NPV, investment will lead to an increase in value to shareholders, which ultimately should end up in the market value of the company.||en_NZ|
|dc.subject||Investment Opportunity Set||en_NZ|
|dc.subject||assets in place||en_NZ|
|dc.subject||future investment options||en_NZ|
|dc.subject||future growth in the book value||en_NZ|
|dc.subject||value to shareholders||en_NZ|
|dc.title||The investment opportunity set and its proxies||en_NZ|
|thesis.degree.grantor||University of Otago||en_NZ|
|otago.school.eprints||Finance & Quantitative Analysis||en_NZ|
|dc.description.references||Adam, Tim, and Vidhan K. Goyal, 2002, The Investment Opportunity Set and its Proxy Variables: Theory and Evidence, Working Paper Hong Kong University of Science and Technology. Baber, William R., Surya N. Janakiraman, and Sok-Hyon Kang, 1996, Investment Opportunities and the Structure of Executive Compensation, Journal of Accounting and Economics 21, 297-318 Barber, Brad M., and John D. Lyon, 1997, Detecting Long-run Abnormal Stock Returns: The Empirical Power and Specification of Test Statistics, Journal of Financial Economics 43, 341-372. Chung, Kee H., and Stephen W. Pruitt, 1994, A Simple Approximation of Tobin's q, Journal of Financial Management 23, 70-74. Gayer, Jennifer J., and Kenneth M. Ga yer, 1993, Additional Evidence on the Association Between the Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies, The Journal of Accounting and Economics 16, 125-160. Jones, Jefferson P., Richard M. Morton, and Thomas F. Schaffer, 2000, Valuation Implications of Investment Opportunities and Earnings Performance, Review of Quantative Finance and Accounting 15, 21-35. Kallapur, Sanjay, and Mark A. Trombley, 1999, The Association Between Investment Opportunity Set Proxies and Realized Growth, Journal of Business Finance and Accounting 26, 505-519 Kallapur, Sanjay, and Mark A. Trombley, 2001, The Investment Opportunity Set: Determinants, Consequences and Measurement, Managerial Finance 27, 3-15. Lyon, John D., and Brad M. Barber, 1999, Improved Methods for Tests of Long-Run Abnormal Stock Returns, Journal of Finance 54, 165-201, Mitchell, Mark L., and Erik Stafford, 2000, Managerial Decisions and Long-'berm Stock Price Performance. The Journal of Business 73, 287-329. Smith, Clifford W. Jr, arid Ross L. Watts, 1992, The Investment Opportunity Set and Corporate Financing, Dividend , and Compcnsation Policies, Journal of Financial Economics 32, 263 – 292.||en_NZ|
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