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Accounting rules, equity valuation, and growth options

Livdan, Dmitry and Nezlobin, Alexander (2017) Accounting rules, equity valuation, and growth options. Review of Accounting Studies, 22 (3). 1122 - 1155. ISSN 1380-6653

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Identification Number: 10.1007/s11142-017-9402-6

Abstract

In a model with irreversible capacity investments, we show that financial statements prepared under replacement cost accounting provide investors with sufficient information for equity valuation purposes. Under alternative accounting rules, including historical cost and value in use accounting, investors will generally not be able to value precisely a firm’s growth options and therefore its equity. For these accounting rules, we describe the range of valuations that is consistent with the firm’s financial statements. We further show that replacement cost accounting preserves all value-relevant information if the firm’s investments are reversible. However, the directional relation between the value of the firm’s equity and the replacement cost of its assets is different from that in the setting with irreversible investments.

Item Type: Article
Official URL: https://link.springer.com/journal/11142
Additional Information: © 2017 Springer Science+Business Media New York
Divisions: Accounting
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
JEL classification: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E22 - Capital; Investment (including Inventories); Capacity
G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting; Fixed Investment and Inventory Studies
M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting
Date Deposited: 01 Nov 2019 16:15
Last Modified: 20 Dec 2019 04:35
URI: http://eprints.lse.ac.uk/id/eprint/102341

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