Investment, Valuation, and Growth Options

Andrew B. Abel, Janice Eberly

Research output: Contribution to journalArticlepeer-review

7 Scopus citations


We develop a model in which the opportunity for a firm to upgrade its technology to the frontier (at a cost) leads to growth options in the firm's value; that is, a firm's value is the sum of value generated by its current technology plus the value of the option to upgrade. Variation in the technological frontier leads to variation in firm value that is unrelated to current cash flow and investment, though variation in firm value anticipates future upgrades and investment. We simulate this model and show that, consistent with the empirical literature, in situations in which growth options are important, regressions of investment on Tobin's Q and cash flow yield small positive coefficients on Q and larger coefficients on cash flow. We also show that growth options increase the volatility of firm value relative to the volatility of cash flow.

Original languageEnglish (US)
Article number1250001
JournalQuarterly Journal of Finance
Issue number1
StatePublished - Mar 1 2012


  • Growth options
  • investment
  • technology upgrades
  • Tobin's Q

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Strategy and Management

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