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Real (Adaptation) Options and the Valuation of Equity: Some Empirical Evidence

Data from 1,374 firms across four broad industrial groupings are used toassess the contribution that real (adaptation) options make to overallequity values. The analysis indicates that real (adaptation) options makea significant contribution to the equity value of firms with a market tobook ratio (of equity) of around unity or less. As the market to bookratio grows beyond this level, however, the contribution made by real(adaptation) options decays quickly away and equity values are mainlycomprised of the present value of the dividends that firms are expectedto pay. This means that for around one in every five of the firms in oursample real (adaptation) options make a significant contribution tooverall equity value. Thus, while linear equity valuation models wouldseem to be appropriate for the substantial majority of firms on which oursample is based, there is a sizeable minority of firms where real (adaptation)options have a significant impact on equity values. For this lattergroup of firms there will be a non-linear relationship between equityvalue and its determining variables. This has important implications forthe regression procedures that are applied in this area of Accountingresearch.

Key words:Accounting; Equity; Real (adaptation) options; Recursionvalue.

Much has been written in recent years about the relationship between equity pricesand the 代写留学生企业财务管理论文book or accounting figures that appear in the corporate financial statements.The predominant paradigm in both the theoretical and empirical literatureis predicated on the assumption that there is a purely linear relationship betweenthe price of a firm’s equity stock and the book figures appearing on its financialstatements (Dechowet al., 1999; Myers, 1999; Morel, 2003). Recently, however,compelling evidence has emerged which suggests there is potentially, a convexand highly non-linear relationship between equity prices and the summary measuresthat appear on corporate financial statements (Burgstahler and Dichev, 1997;Ashtonet al., 2003). Burgstahler and Dichev (1997, p. 188) argue that thesenon-linearities arise out of two chief components comprising equity value. The first of these is called the recursion value of equity and is the expected presentvalue of the stream of future dividends computed under the assumption thatthe firm’s ‘current’ investment opportunity set will remain in force indefinitely.However, Burgstahler and Dichev (p. 188) identify a second component of equityvalue; namely, the real (or adaptation) value of equity. This is the option valuethat arises when the firm can alter its investment opportunity set by (for example)changing the nature of the capital projects in which it invests. Recent papers byYee (2000), Tippett and Yilmaz (2002), Johnstone (2002), Ashtonet al.(2003,2004) and Ostaszewski (2004) develop some analytical properties of the equityvaluation models that arise out of this distinction between recursion and real(adaptation) option value. As yet, however, these analytical models have hadlittle impact on the procedures adopted by empirical researchers in the area.Hence, there is virtually no empirical evidence through which to assess whetherthis distinction between the recursion and adaptation values of equity is of anyempirical significance.1Such evidence as exists, however, is highly suggestive. Using U.S. dataBurgstahler and Dichev (1997, p. 199) gr本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。