Accounting rules, equity valuation, and growth options

Accounting rules, equity valuation, and growth options 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. Review of Accounting Studies Springer Journals

Accounting rules, equity valuation, and growth options

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Springer US
Copyright © 2017 by Springer Science+Business Media New York
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
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