Real (Adaptation) Options and the Valuation of Equity: Some Empirical Evidence

30 Pages Posted: 12 Jun 2006

See all articles by Ali Ataullah

Ali Ataullah

Loughborough University - Business School

Andrew Higson

Loughborough University

Mark J. Tippett

Loughborough University - Business School; University of Exeter Business School

Abstract

Data from 1,374 firms across four broad industrial groupings are used to assess the contribution that real (adaptation) options make to overall equity values. The analysis indicates that real (adaptation) options make a significant contribution to the equity value of firms with a market to book ratio (of equity) of around unity or less. As the market to book ratio grows beyond this level, however, the contribution made by real (adaptation) options decays quickly away and equity values are mainly comprised of the present value of the dividends that firms are expected to pay. This means that for around one in every five of the firms in our sample real (adaptation) options make a significant contribution to overall equity value. Thus, while linear equity valuation models would seem to be appropriate for the substantial majority of firms on which our sample is based, there is a sizeable minority of firms where real (adaptation) options have a significant impact on equity values. For this latter group of firms there will be a non-linear relationship between equity value and its determining variables. This has important implications for the regression procedures that are applied in this area of accounting research.

Suggested Citation

Ataullah, Ali and Higson, Andrew and Tippett, Mark J., Real (Adaptation) Options and the Valuation of Equity: Some Empirical Evidence. Abacus, Vol. 42, No. 2, pp. 236-265, June 2006. Available at SSRN: https://ssrn.com/abstract=907370 or http://dx.doi.org/10.1111/j.1467-6281.2006.00199.x

Ali Ataullah

Loughborough University - Business School ( email )

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

Andrew Higson

Loughborough University ( email )

Ashby Road
Nottingham NG1 4BU
United Kingdom

Mark J. Tippett (Contact Author)

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

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