Discussion: "Opportunities Knocking: Residual Income Valuation of an Adaptive Firm"

There are two points addressed by the author in his critique of the paper "Opportunities Knocking: Residual Income Valuation of an Adaptive Firm," by Kenton K. Yee which appeared in the Summer 2000 issue. The first issue concerns the development of an analytical framework to explain the empirical phenomenon as to why firms, such as the Internet companies, with low earnings carry inexplicably high market values. Furthermore, the second issue concerns the development of an extension of the Edwards-Bell-Ohlson equation that would become consistent with convexity and complementarily. The paper correctly points out that the option or adaptation value is often overlooked in valuation using the EBO model. However, the impression the paper conveys is that the EBO model is inadequately equipped to deal with adaptation value and conceptually incomplete.