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The expected returns and valuations of private and public firms

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  • Cooper, Ilan
  • Priestley, Richard

Abstract

Characteristics play a similar role in describing returns in private firms as in public firms. This evidence suggests a causal effect of optimal investment underlying the role of characteristics, as private firms do not have stock prices to over- or under-react on. Common factor models largely describe the cross section of investment returns of both types of firms, suggesting that the common factors are likely aggregate risk factors. Finally, the cost of capital and firm valuations are similar across private and public firms.

Suggested Citation

  • Cooper, Ilan & Priestley, Richard, 2016. "The expected returns and valuations of private and public firms," Journal of Financial Economics, Elsevier, vol. 120(1), pages 41-57.
    • Handle: RePEc:eee:jfinec:v:120:y:2016:i:1:p:41-57
    DOI: 10.1016/j.jfineco.2016.01.023
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    Cited by:

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    2. Andrei S. Gonçalves & Chen Xue & Lu Zhang, 2017. "Does the Investment Model Explain Value and Momentum Simultaneously?," NBER Working Papers 23910, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Real investment; Systematic risk; Mispricing; q theory; Investment returns; Cost of capital; Private firms; Public firms;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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