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J. Graham, Campbell Harvey (1999)
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Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long-Run PerformanceBehavioral & Experimental Finance
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Andrew Ang, Jun Liu (2002)
How to Discount Cashflows with Time-Varying Expected ReturnsCorporate Finance: Valuation
We show how to decompose a firm's beta into its beta of assets‐in‐place and its beta of growth opportunities. Our empirical results demonstrate that the beta of growth opportunities is greater than the beta of assets‐in‐place for virtually all industries over all periods of time dating back to 1977. The difference has important implications for determining the cost of capital. For example, when choosing comparables to determine a project beta one should match the growth opportunities of the project with those of the comparable firm. Assuming a 6% market equity risk premium, accounting for growth opportunities alters the project cost of capital by as much as 2% to 3%.
Financial Management – Wiley
Published: Jul 1, 2007
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