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Real (adaptation) options and the valuation of equity: some empirical evidence

Ataullah, Ali; Higson, Andrew and Tippett, Mark (2006). Real (adaptation) options and the valuation of equity: some empirical evidence. Abacus, 42(2) pp. 236–265.

DOI (Digital Object Identifier) Link: https://doi.org/10.1111/j.1467-6281.2006.00199.x
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Abstract

Data from 1,374 firms across four broad industrial groupings are used to assess the contribution that real (adaptation) options make to overall equity values. The analysis indicates that real (adaptation) options make a significant contribution to the equity value of firms with a market to book ratio (of equity) of around unity or less. As the market to book ratio grows beyond this level, however, the contribution made by real (adaptation) options decays quickly away and equity values are mainly comprised of the present value of the dividends that firms are expected to pay. This means that for around one in every five of the firms in our sample real (adaptation) options make a significant contribution to overall equity value. Thus, while linear equity valuation models would seem to be appropriate for the substantial majority of firms on which our sample is based, there is a sizeable minority of firms where real (adaptation) options have a significant impact on equity values. For this latter group of firms there will be a non-linear relationship between equity value and its determining variables. This has important implications for the regression procedures that are applied in this area of accounting research.

Item Type: Journal Item
ISSN: 0001-3072
Academic Unit/School: Faculty of Business and Law (FBL) > Business > Department for Accounting and Finance
Faculty of Business and Law (FBL) > Business
Faculty of Business and Law (FBL)
Item ID: 50869
Depositing User: Ali Ataullah
Date Deposited: 07 Sep 2017 15:51
Last Modified: 07 Dec 2018 10:56
URI: http://oro.open.ac.uk/id/eprint/50869
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