Equity value, implied cost of equity and shareholders' real options

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

1 Scopus Citations
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Author(s)

  • Byungcherl Charlie Sohn

Related Research Unit(s)

Detail(s)

Original languageEnglish
Pages (from-to)519-541
Journal / PublicationAccounting and Finance
Volume52
Issue number2
Publication statusPublished - Jun 2012

Abstract

This study investigates the effects of shareholders' real options on (i) firm financial performance and (ii) estimations of the implied cost of equity. After measuring the equity value of steady-state operations using the residual income model, and the abandonment and expansion options using the Black-Scholes option pricing model, I find that firms with a large expansion (abandonment) option value experience better (worse) financial performance than those with a small such value. I also find that ignoring these options results in a downward bias in implied cost of equity estimates by an average of 1.23 percentage points. © 2011 The Author. Accounting and Finance © 2011 AFAANZ.

Research Area(s)

  • Abandonment option, Expansion option, Implied cost of equity, Real options

Citation Format(s)

Equity value, implied cost of equity and shareholders' real options. / Sohn, Byungcherl Charlie.

In: Accounting and Finance, Vol. 52, No. 2, 06.2012, p. 519-541.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review