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Equity value, implied cost of equity and shareholders’ real options

Equity value, implied cost of equity and shareholders’ real options This study investigates the effects of shareholders’ real options on (i) firm financial performance and (ii) estimations of the implied cost of equity. After measuring the equity value of steady‐state operations using the residual income model, and the abandonment and expansion options using the Black‐Scholes option pricing model, I find that firms with a large expansion (abandonment) option value experience better (worse) financial performance than those with a small such value. I also find that ignoring these options results in a downward bias in implied cost of equity estimates by an average of 1.23 percentage points. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Accounting & Finance Wiley

Equity value, implied cost of equity and shareholders’ real options

Accounting & Finance , Volume 52 (2) – Jun 1, 2012

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References (42)

Publisher
Wiley
Copyright
© 2011 The Author. Accounting and Finance © 2011 AFAANZ
ISSN
0810-5391
eISSN
1467-629X
DOI
10.1111/j.1467-629X.2011.00404.x
Publisher site
See Article on Publisher Site

Abstract

This study investigates the effects of shareholders’ real options on (i) firm financial performance and (ii) estimations of the implied cost of equity. After measuring the equity value of steady‐state operations using the residual income model, and the abandonment and expansion options using the Black‐Scholes option pricing model, I find that firms with a large expansion (abandonment) option value experience better (worse) financial performance than those with a small such value. I also find that ignoring these options results in a downward bias in implied cost of equity estimates by an average of 1.23 percentage points.

Journal

Accounting & FinanceWiley

Published: Jun 1, 2012

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