Review of Quantitative Finance and Accounting

, Volume 41, Issue 2, pp 273–294 | Cite as

Managerial flexibility and the wealth effect of new product introductions

Original Research


This paper examines whether investors recognize the value of managerial flexibilities, as proxied by real options, in their valuation of new product introductions. We define a firm’s real options portfolio as the difference between the firm’s market value and its assets in place. A firm’s strategic flexibilities are modeled as the ratio of its real option portfolio to its book value. Using a sample of new product introductions from 1998–2007, we find our real options measure is positively related to announcement period abnormal returns. This result holds after we control for other variables known to be correlated with the announcement effect in previous studies. Our result is robust to alternative measures of real options based on analysts’ earnings expectations and whether a firm has one or multiple segments. In summary, our results suggest that a firm’s perceived strategic and operating flexibilities are an important factor in the valuation of new products.


Real option Managerial flexibilities New product introduction Equity cash flow 

JEL Classification

G14 G30 G32 


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Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  1. 1.The State University of New YorkCantonUSA
  2. 2.California State UniversityFullertonUSA
  3. 3.Rutgers UniversityNew BrunswickUSA

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