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Binomial basis for linear information dynamics: real options, dividends and the valuation of equity
Author(s) -
Ashton David,
Lim Chen,
Tippett Mark,
Wright Brian
Publication year - 2005
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.2005.00138.x
Subject(s) - dividend , valuation (finance) , equity (law) , econometrics , economics , binomial options pricing model , financial economics , actuarial science , mathematics , valuation of options , finance , political science , law
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.