The Differential Effect of Revenue Rises and Cost Savings on Investors’ Valuation of Growth Options. Evidence from a comparative case in the electricity business

This paper seeks to analyze the way investors consider growth option values when pricing equity. To achieve this objective we study the effect on stock prices of a comparative case of direct foreign investment involving acquisition of two different growth options, whose valuation has already been well-documented in prior literature. The case consists of the two sequential investment stages carried out in the Chilean group Enersis by the Spanish electricity company Endesa in the second half of the 1990s. The effect of growth option values on investors’ expectations is analyzed on the basis of the abnormal returns in the period around the time of the investment announcement. Our results show that a growth option which value comes from future rise in sales has a greater impact on stock returns than that of a growth option whose value is based on cost savings.