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Cover von: What Can we Learn from Stock Prices?: Cash Flow, Risk, and Shareholder Welfare
Joshua Mitts

What Can we Learn from Stock Prices?: Cash Flow, Risk, and Shareholder Welfare

Rubrik: Articles
Jahrgang 175 (2019) / Heft 1, S. 178-195 (18)
Publiziert 19.12.2018
DOI 10.1628/jite-2019-0009
Veröffentlicht auf Englisch.
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Beschreibung
Price is expected cash flows discounted at the risk-free rate plus an additional discount for risk exposure. Price equivalency does not always imply welfare equivalency: shareholders are not necessarily indifferent between a price increaseof $1 from higher cash flows and the same $1 increase from lower risk exposure. Even in complete markets, if managers enjoy private benefits of control, the social planner may prefer lower risk exposure to a price-equivalent increase in firm value from greater investor protection. This has implications for event studies, the trade-off between principal costs and agency costs, and the link between macroeconomic risk and corporate governance.