REAL OPTIONS AND THE INFORMATIVENESS OF SEGMENT DISCLOSURES (VALUATION, CAPITAL MARKETS)

This paper examines the relation between firm equity value and disaggregated disclosures using a real-options framework. A manager of a multi-asset firm holds a portfolio of real options to adapt poorly-performing assets and to expand assets with investment opportunities. The portfolio of real options does not have the same value as a single real option on the portfolio of assets. Therefore, disaggregated disclosures are useful because they provide more information about the value of the array of real options in the portfolio. I test the implications of the real-options framework using a sample of multi-segment firms. Consistent with the predictions, I find that the relation between firm equity value and segment accounting data varies with the likelihood of exercise of segment adaptation and expansion options. This framework and supporting empirical evidence provide a direct link between the valuation and managerial-monitoring roles of segment disclosures.