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Risk Spillovers and Required Returns in Capital Budgeting

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  • Bhattacharyya, Sugato
  • Leach, J Chris
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    Abstract

    This article integrates strategic product market analysis with price-taking asset pricing theory. We demonstrate that a firm's market power can lead to scale-dependent and potentially infinite required returns. Scale dependency, which we relate to risk spillovers between expansionary and existing cash flows, reflects the divergence of incremental from existing required returns. The firm-specific nature of risk spillovers potentially destroys the concept of a common industry 'risk class'. Our analysis raises important questions regarding the validity of widely used 'comparables' methods for determining risk-adjusted discount rates. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal Review of Financial Studies.

    Volume (Year): 12 (1999)
    Issue (Month): 3 ()
    Pages: 461-79

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    Handle: RePEc:oup:rfinst:v:12:y:1999:i:3:p:461-79

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    Cited by:
    1. Gavin C. Reid & Julia A. Smith, 2005. "Venture Capital Investor Behaviour in the Backing of UK High Technology Firms: Financial Reporting and the Level of Investment," CRIEFF Discussion Papers 0510, Centre for Research into Industry, Enterprise, Finance and the Firm.
    2. Gavin C. Reid & Julia A. Smith, 2003. "Venture Capital and Risk in High-Technology Enterprises," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 2(3), pages 227-244, December.
    3. Gavin C. Reid, 2002. "Investor Conduct Towards New High Technology Firms: UK Evidence on How Risk is Managed," CRIEFF Discussion Papers 0206, Centre for Research into Industry, Enterprise, Finance and the Firm.
    4. Tobias Schlueter & Soenke Sievers, 2014. "Determinants of market beta: the impacts of firm-specific accounting figures and market conditions," Review of Quantitative Finance and Accounting, Springer, vol. 42(3), pages 535-570, April.

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