  Maintaining a competitive edge requires a firm to replace deteriorating
business lines with new projects. Accordingly, part of a firm's value resides
in its ability to exploit new opportunities. This article incorporates
adaptation into Ohlson's residual income valuation framework and obtains a
non-linear (convex) valuation formula. Although parsimoniously cast, the model
makes two predictions which are consistent with phenomena reported in the
empirical literature: earnings convexity and complementarity. Moreover, the
Appendix introduces a new and powerful Equivalence Theorem. This Equivalence
Theorem relates Modigliani-Miller dividend invariance to complementarity and
earnings convexity in accounting-based valuation. For Web-based Abstract, see:
http://papers.ssrn.com/paper.taf?abstract_id=239368
