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Some Potential Means for Venture Valuation

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  • Wolfgang Stummer

    (University of Ulm)

Abstract

In some modern venture valuation approaches, option pricing theory plays an important role. The aim of this paper is to present some tools and viewpoints which might be helpful for future investigations along this line. We model the value-dynamics Xt of an imbedded underlying X as a non-lognormally-distributed generalization of the geometric Brownian motion. In detail, Xt is supposed to be a solution of a stochastic differential equation of the form with non-constant volatility function ? (t) and Brownian motion Wt . For this, we discuss a certain decision problem concerning the size of the trend function b . Under some handy-toverify but far-reaching assumptions, we investigate the (average) reduction of decision risk that can be obtained by observing the sample path of X . Furthermore, we also show some connections with the valuation of call options on X .

Suggested Citation

  • Wolfgang Stummer, 2002. "Some Potential Means for Venture Valuation," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 7(3), pages 39-52, Fall.
  • Handle: RePEc:pep:journl:v:7:y:2002:i:3:p:39-52
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    References listed on IDEAS

    as
    1. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters,in: Theory Of Valuation, chapter 8, pages 229-288 World Scientific Publishing Co. Pte. Ltd..
    2. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    3. Robert H. Keeley & Sanjeev Punjabi & Lassaad Turki, 1996. "Valuation of Early-Stage Ventures: Option Valuation Models vs. Traditional Approaches," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 5(2), pages 115-138, Summer.
    4. Bruce Kogut, 1991. "Joint Ventures and the Option to Expand and Acquire," Management Science, INFORMS, vol. 37(1), pages 19-33, January.
    5. Mark Rubinstein, 1976. "The Valuation of Uncertain Income Streams and the Pricing of Options," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 407-425, Autumn.
    6. Tailan Chi & Donald J McGuire, 1996. "Collaborative Ventures and Value of Learning: Integrating the Transaction Cost and Strategic Option Perspectives on the Choice of Market Entry Modes," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 27(2), pages 285-307, June.
    7. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    8. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    9. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
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    More about this item

    Keywords

    Venture Capital; New Venture; Valuation;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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