Abstract
In this study, we provide a firm valuation rule under incomplete information. Incomplete information here means that investors have not been informed the true expected return of business cash flows. We describe incomplete information using the filtering theory. We evaluate the firm value under incomplete information with a utility-based valuation rule. The utility-based rule reflects the risk aversion of investors in firm value. We also verify the relation between the quality of information and firm value using sensitivity analysis. This examination indirectly relates the quality of information and cost of capital for the firm. Furthermore, we examine the firm value using the discount cash flow (DCF) method as an example of risk-neutral valuation approaches. By comparing the results of DCF valuation, we describe how a risk-averse investor evaluates the firm under the incomplete information environment.
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