Valuation and Return Dynamics of Research and Development Ventures

51 Pages Posted: 29 Mar 1998

See all articles by Jonathan Berk

Jonathan Berk

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Richard C. Green

Carnegie Mellon University - David A. Tepper School of Business

Vasant Naik

Lehman Brothers International, Europe

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 "technical uncertainty" about the 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 Classification: G31, G24

Suggested Citation

Berk, Jonathan B. and Green, Richard C. and Naik, Vasant, Valuation and Return Dynamics of Research and Development Ventures. Available at SSRN: https://ssrn.com/abstract=46908 or http://dx.doi.org/10.2139/ssrn.46908

Jonathan B. Berk

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Richard C. Green

Carnegie Mellon University - David A. Tepper School of Business ( email )

315B Schenley Park
Pittsburgh, PA 15213-3890
United States
412-268-2302 (Phone)
412-268-7064 (Fax)

Vasant Naik (Contact Author)

Lehman Brothers International, Europe ( email )

25 Bank Street
30th Floor
London E14 5LE
England

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
629
Abstract Views
2,632
rank
44,724
PlumX Metrics