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Valuation under imperfect information: Bayesian learning from the performance of the firm and the market
Author(s) -
Harpaz Giora,
Thomadakis Stavros B.
Publication year - 1987
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090080309
Subject(s) - valuation (finance) , cash flow , terminal value , imperfect , econometrics , economics , operating cash flow , net present value , point estimation , market value , point (geometry) , covariance , financial economics , actuarial science , business , microeconomics , finance , statistics , mathematics , geometry , linguistics , philosophy , production (economics)
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’.