Assuming rational expectations, a specialization of Ross' Arbitrage Pricing Theory is used to obtain a simple securities market valuation formula when dividends follow linear stochastic processes. The implications of this model for the use of accounting data to measure risk and for capital budgeting are explored. A new measure of riskiness based on accounting data is derived, and the use of risk-adjusted discount rates is evaluated.

Dixit has recently presented a model in which established firms select capacity to discourage entry but cannot employ threats they would not rationally execute after entry. Entry deterrence in a slight modification of this model involves the classical limit-price output. Under linear or concave demand, however, the capital cost of a firm of minimum efficient scale is an upper bound on the present value of the monopoly profit stream that can be shielded from entry. It is argued that this suggests the general unimportance of entry barriers erected by scale economies.