Binomial basis for linear information dynamics: real options, dividends and the valuation of equity

DJ Ashton, C Lim, M Tippett, B Wright

Research output: Contribution to journalArticle (Academic Journal)peer-review

Abstract

Analytical research has confirmed that real options give rise to the kind of nonlinearities observed in practice between equity prices and the figures appearing on corporate financial statements. We develop these real option values in terms of a quasi ‘supply-side’ model of linear information dynamics based on simple discrete time binomial filtration processes. Our analysis shows that the linear models that pervade the empirical (and analytical) work of the area, will almost certainly suffer from an omitted variables problem. Parameter estimation will then be inconsistent and inefficient.
Translated title of the contributionBinomial basis for linear information dynamics: real options, dividends and the valuation of equity
Original languageEnglish
Pages (from-to)323 - 350
Number of pages28
JournalAccounting and Finance
Volume45 (3)
DOIs
Publication statusPublished - Nov 2005

Bibliographical note

Publisher: Blackwell

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