Binomial basis for linear information dynamics: Real options, dividends and the valuation of equity

David Ashton*, Chen Lim, Mark Tippett, Brian Wright

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

Analytical research has confirmed that real options give rise to the kind of non-linearities observed in practice between equity prices and the figures appearing on corporate financial statements. We develop these real option values in terms of a quasi 'supply-side' model of linear information dynamics based on simple discrete time binomial filtration processes. Our analysis shows that the linear models that pervade the empirical (and analytical) work of the area, will almost certainly suffer from an omitted variables problem. Parameter estimation will then be inconsistent and inefficient.

Original languageEnglish
Pages (from-to)323-350
Number of pages28
JournalAccounting and Finance
Volume45
Issue number3
DOIs
Publication statusPublished - Nov 2005
Externally publishedYes

Keywords

  • Adaptation value
  • Binomial filtration
  • Linear information dynamics
  • Real options
  • Recursion value

Fingerprint

Dive into the research topics of 'Binomial basis for linear information dynamics: Real options, dividends and the valuation of equity'. Together they form a unique fingerprint.

Cite this