Accounting rules, equity valuation, and growth options

Dmitry Livdan and Alexander Nezlobin ()
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Alexander Nezlobin: University of California

Review of Accounting Studies, 2017, vol. 22, issue 3, No 4, 1122-1155

Abstract: Abstract In a model with irreversible capacity investments, we show that financial statements prepared under replacement cost accounting provide investors with sufficient information for equity valuation purposes. Under alternative accounting rules, including historical cost and value in use accounting, investors will generally not be able to value precisely a firm’s growth options and therefore its equity. For these accounting rules, we describe the range of valuations that is consistent with the firm’s financial statements. We further show that replacement cost accounting preserves all value-relevant information if the firm’s investments are reversible. However, the directional relation between the value of the firm’s equity and the replacement cost of its assets is different from that in the setting with irreversible investments.

Keywords: Equity valuation; Real options; Irreversible investment; Accounting rules (search for similar items in EconPapers)
JEL-codes: E22 G31 M41 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11142-017-9402-6

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