Just read and covered an interesting article by Kothari, Laguerre and Leone which analysed the relative degree of uncertainty of future earnings attributeable to current R&D investment, compared to current Capital expenditure.
The key finding was that R&D investments generate more uncertain future earnings then other capital expenditure. Not that surprising really. However, considering the majority of studies focus on the impact of investments on share price or return, its a little unusual.
Risk plays a large part in the buy/sell/hold decision of investors, and the uncertainty of earnings plays a large part in determining the riskyness of a project or prospective investment.
Does Risk play a part in evaluation? Do we consider risk when we consider the value of an item, or is it a completely seperate factor? I believe it is interrelated.
If a company is not providing a satisfactory return for its inherrent risk, a rational investor will sell his/her shares in that company.
How could I incorporate a similar analysis of a major accounting cost driver or cost centre intot eh evaluation of a company. Just as an aside, are investors really concerned with the inherent risk of the company they are invested in or the risk that they are missing a better alternative investment. (ie. cost of capital or opportunity cost)?