Return predictability and shareholders’ real options

This study re-interprets the properties of the residual income model by highlighting the shareholders’ abandonment (liquidation or adaptation) option. We estimate the value of this real option as an explicit component of abnormal earnings in the residual income model and test the improvement in valuation after incorporating it into the model. Relative to the traditional specification of the residual income model, this real options model has a stronger predictive power for future abnormal stock returns. We also find that the superior return predictability of the real options model is pronounced in the set of firms with a high probability of exercising liquidation options (for example, those with low profitability, low growth opportunities, high underlying asset volatility, and low intangible assets), which is consistent with the importance of shareholders’ abandonment option in equity valuation. The results are robust to extensive sensitivity checks.     

Poor university professors? The relative earnings decline of German professors during the twentieth century

Using individual earnings data from university archives, we analyse the position of university professors within the aggregate income distribution over a time span covering the Kaiserreich, the Weimar Republic, the Third Reich as well as the Federal Republic of Germany. We find that not only did the earnings of professors deteriorate with respect to average incomes, due to the compression of the income distribution, but that professorial earnings no longer sufficed to lift professors into the top 1% of the aggregate income distribution.