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A Model of Market Power, Valuation and the Firm's Returns

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  • Stavros B. Thomadakis

Abstract

This paper presents a model in which risk is admitted through random behavior of the firm's demand and cost functions. In a single period context the effects of monopoly power are analyzed with respect to optimal output and valuation of the firm, as well as relative to the firm's level of systematic risk as exhibited in its market return. In a multiperiod context the results are extended to an infinite horizon and a closed-form valuation expression is derived. Risk in the firm's future investment opportunities is shown to affect both the firm's valuation and changes in such valuation over time. The impact of this type of "growth" risk is directly linked to the firm's ability to obtain monopoly rents in its product market.

Suggested Citation

  • Stavros B. Thomadakis, 1976. "A Model of Market Power, Valuation and the Firm's Returns," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 150-162, Spring.
    • Handle: RePEc:rje:bellje:v:7:y:1976:i:spring:p:150-162
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    Cited by:

    1. Roger Buckland & Julian Williams & Janice Beecher, 2015. "Risk and regulation in water utilities: a cross-country comparison of evidence from the CAPM," Journal of Regulatory Economics, Springer, vol. 47(2), pages 117-145, April.
    2. Dmitry Livdan & Alexander Nezlobin, 2017. "Accounting rules, equity valuation, and growth options," Review of Accounting Studies, Springer, vol. 22(3), pages 1122-1155, September.
    3. Nezlobin, Alexander, 2018. "Dynamic Investment Models in Accounting Research," Foundations and Trends(R) in Accounting, now publishers, vol. 12(3), pages 216-297, December.
    4. stanley c. w. salvary, 2005. "The Accounting Variable And Stock Price Determination," Finance 0502011, University Library of Munich, Germany.
    5. Sunil Dutta & Alexander Nezlobin, 2017. "Dynamic Effects of Information Disclosure on Investment Efficiency," Journal of Accounting Research, Wiley Blackwell, vol. 55(2), pages 329-369, May.
    6. Alexander Nezlobin & Madhav V. Rajan & Stefan Reichelstein, 2016. "Structural properties of the price-to-earnings and price-to-book ratios," Review of Accounting Studies, Springer, vol. 21(2), pages 438-472, June.
    7. Daniel B. Thornton, 1988. "Capital values in use versus replacement costs: Theory and Canadian evidence," Contemporary Accounting Research, John Wiley & Sons, vol. 5(1), pages 343-370, September.
    8. Francisco Palomino & Erica Li, 2010. "Monetary Policy Risk and the Cross-Section of Stock Returns," 2010 Meeting Papers 935, Society for Economic Dynamics.
    9. Alexander Nezlobin, 2012. "Accrual Accounting, Informational Sufficiency, and Equity Valuation," Journal of Accounting Research, Wiley Blackwell, vol. 50(1), pages 233-273, March.
    10. Manuel L. Jose & Jerry L Stevens, 1987. "Product Market Structure, Capital Intensity, And Systematic Risk: Empirical Results From The Theory Of The Firm," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 10(2), pages 161-175, June.

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