Binomial Basis for Linear Information Dynamics: Real Options, Dividends and the Valuation of Equity

28 Pages Posted: 26 Nov 2005

See all articles by David J. Ashton

David J. Ashton

University of Bristol - Department of Economics

Chen Lim

University of Exeter Business School

Mark J. Tippett

Loughborough University - Business School; University of Exeter Business School

Brian Wright

University of Exeter Business School

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.

Suggested Citation

Ashton, David John and Lim, Chen and Tippett, Mark J. and Wright, Brian, Binomial Basis for Linear Information Dynamics: Real Options, Dividends and the Valuation of Equity. Accounting and Finance, Vol. 45, No. 3, pp. 323-350, November 2005. Available at SSRN: https://ssrn.com/abstract=856447 or http://dx.doi.org/10.1111/j.1467-629X.2005.00138.x

David John Ashton (Contact Author)

University of Bristol - Department of Economics ( email )

8 Woodland Road
Bristol BS8 ITN
United Kingdom
+44 (0)117 928 8423 (Phone)

Chen Lim

University of Exeter Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

Mark J. Tippett

Loughborough University - Business School ( email )

Ashby Road
Loughborough
Nottingham NG1 4BU, LE11 3TU
Great Britain

University of Exeter Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

Brian Wright

University of Exeter Business School ( email )

Department of Accounting and Finance
Exeter, Devon EX4 4PU
United Kingdom
+44 1392 264480 (Phone)

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