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The Influence of Production Technology on Risk and the Cost of Capital

Published online by Cambridge University Press:  06 April 2009

Laurence Booth
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Abstract

This paper uses a time-state-preference valuation model to examine how the firm's choice of technology and production method affects its equilibrium level of risk and, as a result, the firm's cost of capital. A fixed and flexible method of production is analyzed for a firm using a Cobb-Douglas production function. In both cases, it is found that risk and the cost of capital decrease with the level of capital intensity. Implications are drawn for the specification of empirical tests of the determinants of risk.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 26 , Issue 1 , March 1991 , pp. 109 - 127
Copyright
Copyright © School of Business Administration, University of Washington 1991

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