Incomplete Information, Exercise Policy, and the Valuation of Claims on Noisy Real Assets

Posted: 10 Jan 1997

See all articles by Paul D. Childs

Paul D. Childs

University of Kentucky

Steven H. Ott

University of North Carolina (UNC) at Charlotte - Department of Finance & Business Law

Timothy J. Riddiough

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Date Written: October 1996

Abstract

Real option values often depend on assets that are infrequently traded and lack a continuously reliable value benchmark. In this paper we develop a methodology for valuing a wide variety of claims on noisy real assets, including those that are European, American, compound and strategic in nature. When asset value information is incomplete, a weighted average of the noisy signal of asset value and the asset's forward price is used to determine conditional asset value and option exercise policy. We show that exercise policy can differ dramatically from a policy that results when information is complete. Applications involving discount debt, levered lease transactions with coupon debt financing, and imperfect competition in new product markets with information spillover are considered to illustrate our methodology. The potential implementation of information acquisition technology, implications for the observed =EBunderexercise=ED of certain real options, and the likelihood of investment cascading behavior are also analyzed.

JEL Classification: G13

Suggested Citation

Childs, Paul David and Ott, Steven H. and Riddiough, Timothy J., Incomplete Information, Exercise Policy, and the Valuation of Claims on Noisy Real Assets (October 1996). Available at SSRN: https://ssrn.com/abstract=9206

Paul David Childs (Contact Author)

University of Kentucky ( email )

College of Business & Economics
Lexington, KY 40506-0034
United States
606-257-2490 (Phone)
606-257-9688 (Fax)

Steven H. Ott

University of North Carolina (UNC) at Charlotte - Department of Finance & Business Law ( email )

9201 University City Blvd.
Charlotte, NC 28223
United States
704-687-2744 (Phone)
704-687-6987 (Fax)

Timothy J. Riddiough

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-3531 (Phone)
608-265-2738 (Fax)

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