Valuation and Return Dynamics of New Ventures

Jonathan B. Berk, Richard Green and Vasant Naik

No 6745, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: G12 G31 (search for similar items in EconPapers)
Date: 1998-10
New Economics Papers: this item is included in nep-cfn
Note: AP
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Citations: View citations in EconPapers (5)

Published as Jonathan B. Berk, 2004. "Valuation and Return Dynamics of New Ventures," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 17(1), pages 1-35.

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Working Paper: Valuation and Return Dynamics of New Ventures (1998)
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