The Real Options Component and Market Value of Taiwan Technological Companies

ABSTRACT

Real options valuation has been applied in real investment extensively. However the empirical researches of real options components’ value are seldom studied. This study uses the panel data model to test whether the stock prices of Taiwan listed companies reflect investor’s expectations regarding the value of real options. This article demonstrates that investors cannot ignore the real options components when evaluating stock market value. The results also confirm that the proportion of a firm’s market value not due to assets-in-place is significantly and positively related to the variables of stock beta, skewness of stock returns, size, capital stock, and research and development. In addition, firms with lower firm life cycle have a higher real options value.

KEY WORDS:

• real options
• assets-in-place
• research and development
• panel data model

Funding

I gratefully acknowledge financial support for this research from Ministry of Science and Technology in Taiwan (NSC 101-2410-H-251 -007).

Notes

1. Kester (1984) was a pioneer in attributing the portion of a firm’s capitalization not explained by assets-in-place to the present value of its growth options. See Danbolt, Hirst, and Jones (2002) for a critical analysis of the empirical validity of Kester’s model.