An Informational Theory of the Dynamic Value of the Firm

David Yeung and Wing-Keung Wong
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David Yeung: SRS Consortium for Advanced Study, Shue Yan University, Hong Kong2Center of Game Theory, St Petersburg State University, Department of Finance, Asia University, Taiwan
Wing-Keung Wong: Department of Finance, Fintech & Blockchain Research Center and Big Data Research Center, Asia University, Taiwan4Department of Medical Research, China Medical University Hospital, Department of Economics and Finance, The Hang Seng University of Hong Kong, Hong Kong

Annals of Financial Economics (AFE), 2023, vol. 18, issue 01, 1-22

Abstract: This paper formulates an informational theory of the evolving value of the firm under uncertainties and unknowns in the future payoff structures. In general, the horizon of business firms would last for an indefinitely long period of time, and events in the considerably far future are intrinsically unknown. The existing study of indefinite horizon firms often relies on the assumption of time-invariant structures for the derivation of an optimal solution. In this paper, information about the firm’s future payoffs will be revealed as time goes by. The firm will revise its strategies accordingly, and the process will continue indefinitely. This new approach for the analysis of infinite horizon firms via information updating provides a more realistic and practical alternative to the study of the dynamic value of the firm. Finally, information-based option pricing formulae and non-random walks and cycles in asset price can also be generated with this theory.

Keywords: Value of the firm; information updating; infinite horizon; uncertain payoff structures (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S2010495222500166

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