Real Option Based Equity Valuation Models: An Empirical Analysis

A. William Richardson, Raafat R. Roubi and Hemantha S. B. Herath
Additional contact information
A. William Richardson: McMaster University, Canada
Raafat R. Roubi: Brock University, Canada
Hemantha S. B. Herath: Brock University, Canada

Chapter 1 in Advances in Quantitative Analysis of Finance and Accounting, 2006, pp 1-35 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis paper provides empirical evidence in support of real option based equity valuation models that relate share price to accounting earnings and book value. Our empirical results are generally consistent with the predictions of several models, all of which are based on real options theory. However, we find that the basic model, which includes components related to put and call options, fits the data more efficiently and parsimoniously than do models modified for the level of firm efficiency (i.e., accounting profitability measured as the return on common equity book value). We also find that the fit of the basic model and the derived coefficients vary with firm efficiency as measured by accounting profitability. We also test for the impact of capital structure on equity valuation and find some evidence for the relevance of debt for loss firms (i.e., low efficiency firms) and growth firms. We find anomalous results for loss firms, consistent with previous research, and provide an explanation for them. Our research contributes to the valuation literature by studying the empirical validity of a general real option based model and thus extends previous empirical studies that were based more or less on an options approach. Our contribution is significant in that there have been many theoretical papers on real options, but few empirical studies of the predictions of these models.

Keywords: Earnings Management; Management Compensation; Option Theory and Application; Debt Management and Interest Rate Theory; Portfolio Diversification; Earnings Surprise (search for similar items in EconPapers)
Date: 2006
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789812772824_0001 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789812772824_0001 (text/html)
Ebook Access is available upon purchase.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:wschap:9789812772824_0001

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().