An Empirical Analysis of Kosdaq Companies' Valuation Using Real Option

Abstract

The objective of this study is to introduce real optionvaluation method and value the venture companies and Kosdaq market itself.The concept of real option model is managerial flexibility in dealing with the uncertainties by having option in place. Real option reasoning is a logic for valuing the venture companies that maximize access to upside opportunities while containing costs and downside risk. The real option model cures the problems of the traditional valuation methods(eg. DCF, Price Multiples) in valuing that is uncertain cash flow, there is an opportunity todelay, expand or abandon the business that is critical characteristic of ventures.In this paper I applied the Carr-Jarrow, Mcdonald-Siegel model to the valuation of the venture companies and entire Kosdaq market. And also I empirically applied the real option model to find out whether ventures are reasonable priced or not.The result of study indicates that a valuation of venture companies and market have severly overvalued. Especially in 2000, the amount overvaluation of Kosdaq market is about 82quadrillion won.Therefore, for reasonably estimation of high variability caused by ventures characteristics of the future growth trend and their uncertainty, Carr-Jarrow, Mcdonald-Siegel model can be alternative corporate valuation model and valuable thenconventional valuation models.