Jouahn Nam

Determinants of corporate growth opportunities of emerging firms

Abstract Recently, several questions have been raised about how the market capitalization of young technology firms is determined, even as they continue to generate negative earnings. In this paper we present an empirical analysis of a real options valuation model of intangible assets. Using a sample of 243 Internet and biotech firms, we examine the determinants of growth opportunities of emerging firms. We show that the speed of innovation is a critical determinant of a firm’s market value. We also establish a differential impact of volatility on real growth options. In particular, we find that the value of an at-the-money real growth option rises with higher volatility, whereas the value of a deep in-the-money real growth option is less sensitive to volatility changes.

Managerial Career Concerns and Risk Management

We present a dynamic model of corporate risk management and managerial career concerns. We show that managers with low (high) initial reputation have high (low) career concerns about keeping their jobs and receiving all future income. These managers are more likely to speculate (hedge) early in their careers. In the later stage of their careers when managers have less career concerns, there is no speculative motive for self interested managers. On the other hand, highly reputable managers have minimal career concerns and they engage in neither hedging nor speculation early in their careers, but they may choose to hedge after poor early performance.

Shorting Leveraged ETF Pairs

This article examines the strategy of shorting a pair of leveraged ETFs and inverse leveraged ETFs of the same index. The profitability of this strategy does not depend on the direction of the underlying benchmark. The authors derive an approximation formula to show that the expected return is high when the weighted sum of various orders of autocorrelations is negative and the volatility of the underlying index is high. They then study the trading strategy in six markets and show that it can generate mean monthly returns of over 1% in four markets. The returns can be further enhanced if they exploit the persistence of the volatility and start the shorting pair strategy when the observed volatility is high.