The Investment Opportunity Set and its Proxy Variables: Theory and Evidence
Preprint
- 1 January 2002
- preprint
- Published by Elsevier BV in SSRN Electronic Journal
Abstract
We use a real options approach to evaluate the performance of several proxy variables for a firm’s investment opportunity set. The results show that, on a relative scale, the market-to-book assets ratio has the highest information content with respect to investment opportunities. Although both the market-to-book equity and the earnings-price ratios are related to investment opportunities, they do not contain information that is not already contained in the market-to-book assets ratio. Consistent with this finding, a common factor constructed from several proxy variables does not improve the performance of the market-to-book assets ratio.Peer RevieweKeywords
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