Valuation and Return Dynamics of New Ventures / Jonathan B. Berk, Richard C. Green, Vasant Naik.

Format:

Book

Author/Creator:

Berk, Jonathan B.

Contributor:

National Bureau of Economic Research.

Green, Richard C.

Naik, Vasant.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6745.

NBER working paper series no. w6745

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1998.

Summary:

We develop and analyze a model of a multi-stage investment project that captures many features of R&D ventures and start-up companies. An important feature these problems share is that the firm learns about the potential profitability of the project throughout its life, but that research and development effort itself is only resolved through additional investment by the firm. In addition, the risks associated with the ultimate cash flows the firm realizes on completion of the project have a systematic component, while the purely technical risks are idiosyncratic. Our model captures these different sources of risk, and allows us to study their interaction in determining the risk premia earned by the venture during development. Our results show that the systematic risk, and the required risk premium, of the venture are highest early in its life, and decrease as it approaches completion, despite the idiosyncratic nature of the technical risk.

Notes:

Print version record

October 1998.