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Title: The impact of abandonment options on accounting-based equity valuation in the UK
Author: Lim, Chen Vui.
Awarding Body: University of Exeter
Current Institution: University of Exeter
Date of Award: 2006
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The main themes of this thesis are abandonment options and their impact on accounting-based equity valuation in the UK security market. Extant and mostly USbased empirical and analytical research suggests that abandonment options (i. e. managerial flexibility in either keeping the company's operations in going concern or abandoning them for their salvage value) help explain two frequently observed empirical phenomena: (1) equity market value is a convex function of earnings and equity book value (or the "convexity" phenomenon), and (2) the equity valuation roles played by the profit & loss account and balance sheet are complementarily linked with the likelihood of abandonment options being exercised (or the "complementarity" phenomenon). The main subject of this empirical study is this latter form of the abandonment options hypothesis ("AOH"). In particular, the study seeks to investigate if the pricing multiples and incremental explanatory power of the balance sheet (profit and loss account) increase (decrease) as the likelihood of abandonment options being exercised increases. A re-examination of the AOH in the context of the UK security market is particularly warranted because of the contrasting differences in institutional factors between the UK and US. Using a dual sample groups approach (i. e. ex post insolvent and ex-ante financially distressed companies) and research design similar to that of Barth et al (1998) and Schnusenberg and Skantz (1998), the study finds that overall the AOH is only partially supported by empirical evidence in the UK. Although some supportive evidence is found and the results are robust to the controls for various potentially confounding factors, the overall conclusion is highly sensitive to the research design employed. Specifically, model specifications have a crucial bearing on whether or not the AOH is rejected. These contrasting results (to the US findings) may be attributable to (1) sampling variations, (2) the different ways in which scale effects have been controlled for and/or (3) the different institutional factors (e. g. insolvency codes) between the two security markets. The results also suggest that more research is needed in order to understand the real causes of the non-linear valuation characteristics of key accounting measures.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available