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Journal of Finance Vol. 61 No. 3 2006

Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long‐Run Performance

Murray Carlson; Adlai Fisher; Ron Giammarino1

1 The authors are from the Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, BC, V6T 1Z2. We appreciate helpful comments from Jonathan Berk, Harjoat Bhamra, Martin Boyer, Glen Donaldson, Julian Douglass, Bernard Dumas, Joao Gomes, Rick Green, Jonathan Karpoff, David

Abstract

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.

DOI
10.1111/j.1540-6261.2006.00865.x
Volume
61
Issue
3
Pages
1009-1034
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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