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Valuation under imperfect information: Bayesian learning from the performance of the firm and the market

This paper develops a valuation model for a project or firm in the presence of uncertainty about the mean of the probability distribution of the cash flows generated by the project. Its major point is that in the presence of parameter uncertainty the value of the project is smaller than in the case...

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Bibliographic Details
Published in:Managerial and decision economics 1987-09, Vol.8 (3), p.229-234
Main Authors: Harpaz, Giora, Thomadakis, Stavros B.
Format: Article
Language:English
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Summary:This paper develops a valuation model for a project or firm in the presence of uncertainty about the mean of the probability distribution of the cash flows generated by the project. Its major point is that in the presence of parameter uncertainty the value of the project is smaller than in the case where the mean cash flows is perfectly known. The second point is that when there is a known covariance between project cash flows and aggregate market cash flows investors can learn about the unknown mean cash flows by observing the market. This is referred to as `learning from the market'.
ISSN:0143-6570
1099-1468
DOI:10.1002/mde.4090080309