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RFS Advance Access originally published online on August 11, 2003
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Rev Fin 2004; 17:1-35
© 2004 The Society for Financial Studies

Valuation and Return Dynamics of New Ventures

Jonathan B. Berk
University of California, Berkeley and National Bureau of Economic Research

Richard C. Green
Carnegie Mellon University

Vasant Naik
Lehman Brothers

Address correspondence to Jonathan Berk, Haas School of Business, University of California, Berkeley, CA 94720-1900, or e-mail: berk{at}haas.berkeley.edu.

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.


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