TY  - JOUR
AU  - Berk,Jonathan B.
AU  - Green,Richard C.
AU  - Naik,Vasant
TI  - Valuation and Return Dynamics of New Ventures
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6745
PY  - 1998
Y2  - October 1998
UR  - http://www.nber.org/papers/w6745
L1  - http://www.nber.org/papers/w6745.pdf
N1  - Author contact info:
Jonathan B. Berk
Graduate School of Business
Stanford University
518 Memorial Way
Stanford CA 94305-5015
Tel: 650/721-1280
Fax: 650/725-6152
E-Mail: jonathan.b.berk@gmail.com

Richard Green
Tepper School of Business
Carnegie Mellon University
Pittsburgh, PA 15213
Tel: 412/268-2302
E-Mail: rcgreen@cmu.edu

vasant naik
E-Mail: vasant.naik@uk.nomura.com
AB  - 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.
ER  -