Option Strategies for Earnings Announcements: A Comprehensive, Empirical Analysis

13. Valuation

Two companies with similar fundamental measures such as book value, earnings, and sales are often valued differently by the market. One reason for different valuations is the differences in each company’s growth potential. For example, if two stocks report the same current earnings per share but one is expected to grow twice as fast as the other, it makes sense for the faster-growing stock to trade at a higher valuation. Another reason is sentiment. If investors’ sentiment toward a stock or a sector is high (low), this stock or sector tends to be valued higher (lower) than other stocks or sectors. An example of this explanation is the sky-high valuation of technology stocks during the Internet bubble. Investors were (wrongly) convinced ...