Equity Misvaluation and Default Options

Details

Serval ID
serval:BIB_DF85604152D0
Type
Article: article from journal or magazin.
Collection
Publications
Title
Equity Misvaluation and Default Options
Journal
The Journal of Finance
Author(s)
Eisdorfer A., Goyal A., Zhdanov A.
ISSN
0022-1082
Publication state
Published
Issued date
04/2019
Peer-reviewed
Oui
Volume
74
Number
2
Pages
845-898
Language
english
Abstract
Abstract
We study whether default options are mispriced in equity prices by employing a structural equity valuation model that explicitly takes into account the value of the option to default (or abandon the firm) and uses firm-specific accounting inputs. We implement our model on the entire cross-section of stocks and identify both over- and underpriced equity. An investment strategy that buys stocks that are classified as undervalued by our model and shorts overvalued stocks generates an annual 4-factor alpha of about 11% for U.S. stocks. The model’s performance is stronger for stocks with higher value of default option, such as distressed or highly volatile stocks. We find similar results in a sample of nine most highly capitalized developed markets.
Keywords
Economics and Econometrics, Accounting, Finance
Web of science
Create date
28/01/2018 23:17
Last modification date
22/05/2020 6:21
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