Valuation and Return Dynamics of New Ventures

Jonathan B. Berk; Richard C. Green; Vasant Naik

doi:10.1093/rfs/hhg021

Valuation and Return Dynamics of New Ventures

Jonathan B. Berk^1,2; Richard C. Green³; Vasant Naik⁴

¹ National Bureau of Economic Research · ² University of California, Berkeley · ³ Carnegie Mellon University · ⁴ Lehman College

Review of Financial Studies 2004

A dynamic model of a multistage investment project that captures many features of research and development (R&D) ventures and start-up companies is developed. An important feature these problems share is that firms learn about the potential profitability of the project throughout its life, but that technical uncertainty about the R&D effort is only resolved through additional investment. Consequently the risks associated with the ultimate cash flows have a systematic component even 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 value and risk premium of the venture.

DOI: 10.1093/rfs/hhg021
Volume: 17 (1)
Pages: 1-35
Language: en
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