Table 4

Table 4                                            
When valuing a project, do you adjust either the discount rate or cash flows for the following risk factors? (Check the most appropriate box for each factor).                                            
Percentage of respondents choosing each category is reporteda                                            
                                             
  Overall Size P/E
          Discount rate Cash Flow Both Neither Discount rate Cash Flow Both Neither
  Disc. Cash                                        
  rate flow Both Neither Small Large Small Large Small Large Small Large Growth Non-G Growth Non-G Growth Non-G Growth Non-G
b) interest rate risk (change in general level of interest rates) 15.30 8.78 24.65 51.27 17.33 12.67 7.43 10.67 29.70 17.33 45.54 59.33 ** 13.39 7.06 7.09 16.47 22.83 18.82 56.69 57.65 .
f) foreign exchange risk 10.80 15.34 18.75 55.11 7.43 15.44 9.90 22.82 15.35 23.49 67.33 38.26 *** 10.24 18.75 14.96 22.50 22.83 23.75 51.97 35.00 **
d) GDP or business cycle risk 6.84 18.80 18.80 55.56 6.93 6.76 12.87 27.03 19.80 17.57 60.40 48.65 ** 6.98 7.41 24.03 18.52 22.48 14.81 46.51 59.26 *
a) risk of unexpected inflation 11.90 14.45 11.90 61.76 13.43 9.93 9.95 20.53 14.93 7.95 61.69 61.59 . 12.40 9.64 14.73 16.87 10.08 12.05 62.79 61.45 .
h) size (small firms being riskier) 14.57 6.00 13.43 66.00 14.43 14.67 7.46 4.00 16.92 8.67 61.19 71.33 ** 14.84 15.66 7.03 3.61 17.19 9.64 60.94 68.67 .
e) commodity price risk 2.86 18.86 10.86 67.43 2.49 3.38 12.94 27.03 9.45 12.84 75.12 56.76 *** 3.12 4.94 20.31 24.69 12.50 7.41 64.06 62.96 .
c ) term structure risk (change in the long-term vs. short term interest rate) 8.57 3.71 12.57 75.14 10.45 6.08 2.99 4.73 14.93 9.46 71.64 79.73 * 7.03 6.10 3.12 6.10 10.94 17.07 78.91 70.73 .
g) distress risk (probability of bankruptcy) 7.41 6.27 4.84 81.48 5.94 9.40 4.95 8.05 6.93 2.01 82.18 79.87 . 6.98 15.85 6.98 6.10 6.98 n/a 79.07 76.83 .
i) “market-to-book” ratio (ratio of market value of firm to book value of assets) 3.98 1.99 7.10 86.93 4.46 3.36 1.49 2.68 8.91 4.70 85.15 89.26 . 2.38 8.43 3.17 1.20 5.56 6.02 88.89 84.34 .
j) momentum (recent stock price performance). 3.43 2.86 4.86 88.86 3.98 2.70 2.99 2.70 6.47 2.70 86.57 91.89 . 3.15 4.94 2.36 4.94 4.72 1.23 89.76 88.89 .
                                             
                                             
                                             
          Leverage                  
          Discount rate Cash Flow Both Neither                  
                                             
          Low High Low High Low High Low High                  
b) interest rate risk (change in general level of interest rates)         14.29 18.12 10.71 6.52 24.40 23.19 50.60 52.17 .                  
f) foreign exchange risk         12.88 7.09 12.88 18.44 17.18 21.99 57.06 52.48 .                  
d) GDP or business cycle risk         6.83 4.96 13.66 28.37 16.15 24.82 63.35 41.84 ***                  
a) risk of unexpected inflation         13.94 10.71 10.91 16.43 8.48 13.57 66.67 59.29 .                  
h) size (small firms being riskier)         10.37 15.60 6.71 5.67 17.68 9.93 65.24 68.09 .                  
e) commodity price risk         1.24 4.32 14.29 26.62 12.42 8.63 72.05 60.43 **                  
c ) term structure risk (change in the long-term vs. short term interest rate)         6.17 11.43 6.17 2.14 10.49 15.71 77.16 70.71 .                  
g) distress risk (probability of bankruptcy)         4.82 8.45 6.63 6.34 4.82 4.23 83.73 80.99 .                  
i) “market-to-book” ratio (ratio of market value of firm to book value of assets)         3.61 4.32 3.61 0.72 6.63 7.19 86.14 87.77 .                  
j) momentum (recent stock price performance).         3.68 3.55 2.45 3.55 4.91 4.26 88.96 88.65 .                  
                                             
                                             
                                             
Table 4 (continued)                                            
When valuing a project, do you adjust either the discount rate or cash flows for the following risk factors? (Check the most appropriate box for each factor).                                            
                                             
          Pay dividends Industry
          Discount rate Cash Flow Both Neither Discount rate Cash Flow Both Neither
                                             
          Yes No Yes No Yes No Yes No Man. Other Man. Other Man. Other Man. Other
b) interest rate risk (change in general level of interest rates)         12.11 19.75 10.53 6.37 22.11 27.39 55.26 46.50 . 13.92 17.56 6.70 12.21 22.16 27.48 57.22 42.75 **
f) foreign exchange risk         14.89 6.37 16.49 14.01 20.21 16.56 48.40 63.06 *** 11.52 11.28 17.80 13.53 23.04 15.79 47.64 59.40 **
d) GDP or business cycle risk         5.91 8.23 25.27 10.76 18.28 19.62 50.54 61.39 ** 5.18 9.85 23.83 12.88 20.21 17.42 50.78 59.85 .
a) risk of unexpected inflation         9.57 15.19 19.15 9.49 11.70 12.66 59.57 62.66 . 10.77 13.74 17.44 9.16 12.31 11.45 59.49 65.65 .
h) size (small firms being riskier)         15.59 13.29 6.45 5.70 10.75 16.46 66.67 63.92 . 12.50 17.29 6.25 6.02 13.02 14.29 68.23 60.90 .
e) commodity price risk         4.32 1.25 23.24 13.75 12.43 9.38 60.00 75.62 *** 2.09 3.79 26.18 11.36 13.09 9.09 58.64 75.76 ***
c ) term structure risk (change in the long-term vs. short term interest rate)         6.45 11.46 3.76 3.18 12.37 12.74 77.42 72.61 . 5.73 11.54 3.12 5.38 9.90 16.15 81.25 66.92 ***
g) distress risk (probability of bankruptcy)         9.57 5.10 6.91 5.10 4.26 5.73 78.72 84.08 . 7.69 7.75 3.59 10.08 6.15 3.88 82.56 77.52 .
i) “market-to-book” ratio (ratio of market value of firm to book value of assets)         4.28 3.80 2.67 1.27 7.49 6.96 85.56 87.97 . 3.09 5.34 2.58 1.53 5.15 9.92 89.18 83.21 .
j) momentum (recent stock price performance).         3.23 3.82 4.30 1.27 3.76 6.37 88.71 88.54 . 1.55 6.15 2.59 3.08 2.59 7.69 93.26 83.08 ***
                                             
                                             
                                             
          Management ownership CEO age
          Discount rate Cash Flow Both Neither Discount rate Cash Flow Both Neither
                                             
          Low High Low High Low High Low High Mature Young Mature Young Mature Young Mature Young
b) interest rate risk (change in general level of interest rates)         16.17 14.50 8.98 6.87 16.17 32.06 58.68 46.56 ** 11.84 16.54 10.53 8.27 26.32 23.68 51.32 51.50 .
f) foreign exchange risk         15.98 5.47 18.34 10.94 20.71 19.53 44.97 64.06 *** 8.00 11.28 13.33 16.54 25.33 16.54 53.33 55.64 .
d) GDP or business cycle risk         9.52 3.91 23.81 14.84 15.48 23.44 51.19 57.81 . 9.46 6.02 17.57 19.55 18.92 19.55 54.05 54.89 .
a) risk of unexpected inflation         13.94 12.98 16.36 9.92 8.48 12.21 61.21 64.89 . 13.16 11.65 18.42 13.53 14.47 10.53 53.95 64.29 .
h) size (small firms being riskier)         17.26 11.54 4.17 10.00 7.74 19.23 70.24 58.46 ** 14.29 15.15 5.19 5.68 16.88 12.50 63.64 65.91 .
e) commodity price risk         4.24 2.29 21.82 16.03 9.09 12.98 64.85 68.70 . 1.33 3.41 16.00 20.08 18.67 9.09 64.00 67.42 .
c ) term structure risk (change in the long-term vs. short term interest rate)         6.67 11.45 3.03 4.58 13.33 11.45 76.97 72.52 . 1.35 10.90 5.41 3.38 10.81 12.41 82.43 73.31 .
g) distress risk (probability of bankruptcy)         8.98 6.92 6.59 6.92 3.59 6.15 80.24 80.00 . 10.39 6.44 1.30 7.95 2.60 5.30 85.71 79.92 .
i) “market-to-book” ratio (ratio of market value of firm to book value of assets)         5.39 3.08 2.40 1.54 4.79 8.46 87.43 86.92 . 6.58 3.40 n/a 2.64 9.21 6.42 84.21 87.55 .
j) momentum (recent stock price performance).         3.59 3.88 3.59 2.33 2.40 7.75 90.42 86.05 . 5.56 3.00 1.39 3.37 8.33 3.75 84.72 89.89 .
                                             
                                             
                                             
                                             
Table 4 (continued)                                            
When valuing a project, do you adjust either the discount rate or cash flows for the following risk factors? (Check the most appropriate box for each factor).                                            
                                             
                                             
          CEO tenure CEO MBA
          Discount rate Cash Flow Both Neither Discount rate Cash Flow Both Neither
                                             
          Long Short Long Short Long Short Long Short Yes No Yes No Yes No Yes No
b) interest rate risk (change in general level of interest rates)         14.88 15.53 10.74 7.76 30.58 20.09 43.80 56.62 ** 15.50 15.58 10.85 7.54 23.26 24.62 50.39 52.26 .
f) foreign exchange risk         13.22 8.72 9.92 19.27 19.01 18.35 57.85 53.67 . 12.60 9.45 20.47 11.94 20.47 16.92 46.46 61.69 ***
d) GDP or business cycle risk         5.83 7.31 21.67 18.26 19.17 18.72 53.33 55.71 . 7.94 6.44 19.05 18.32 21.43 19.31 51.59 55.94 .
a) risk of unexpected inflation         11.67 12.22 16.67 13.57 16.67 8.60 55.00 65.61 * 10.08 12.00 17.83 12.00 10.85 12.00 61.24 64.00 .
h) size (small firms being riskier)         14.88 15.14 6.61 5.05 13.22 13.30 65.29 65.60 . 17.19 12.38 6.25 5.45 14.06 12.87 62.50 68.32 .
e) commodity price risk         0.83 4.17 16.53 20.37 10.74 11.57 71.90 63.89 . 3.94 2.50 18.90 18.50 11.81 11.00 65.35 68.00 .
c ) term structure risk (change in the long-term vs. short term interest rate)         7.56 9.59 2.52 4.57 10.92 12.33 78.99 73.52 . 11.72 7.50 3.12 4.00 13.28 11.00 71.88 77.50 .
g) distress risk (probability of bankruptcy)         10.00 5.94 8.33 5.48 3.33 5.48 78.33 82.65 . 8.59 6.47 6.25 6.47 3.91 5.47 81.25 81.09 .
i) “market-to-book” ratio (ratio of market value of firm to book value of assets)         2.48 5.05 1.65 2.29 6.61 7.34 89.26 85.32 . 5.56 3.45 0.79 2.46 4.76 7.88 88.89 86.21 .
j) momentum (recent stock price performance).         1.69 4.57 0.85 4.11 4.24 5.02 93.22 86.30 * 3.97 2.99 0.79 4.48 6.35 3.48 88.89 89.05 .
                                             
                                             
                                             
                                             
          Regulated Target debt ratio
          Discount rate Cash Flow Both Neither Discount rate Cash Flow Both Neither
                                             
          Yes No Yes No Yes No Yes No No Yes No Yes No Yes No Yes
b) interest rate risk (change in general level of interest rates)         14.29 16.12 9.52 8.22 23.81 23.03 52.38 52.63 . 17.84 11.64 7.57 8.22 23.78 27.40 50.81 52.74 .
f) foreign exchange risk         9.52 11.84 9.52 15.13 14.29 19.08 66.67 53.95 . 12.90 7.69 14.52 16.78 17.20 20.28 55.38 55.24 .
d) GDP or business cycle risk         4.76 7.26 9.52 18.48 14.29 18.48 71.43 55.78 . 8.56 3.55 20.32 17.73 18.72 17.02 52.41 61.70 *
a) risk of unexpected inflation         4.76 13.20 38.10 12.87 4.76 11.88 52.38 62.05 . 14.52 6.90 12.90 15.86 8.60 15.86 63.98 61.38 .
h) size (small firms being riskier)         20.00 14.80 5.00 5.26 n/a 14.14 75.00 65.13 . 14.89 13.29 6.38 5.59 13.83 13.99 64.36 66.43 .
e) commodity price risk         4.76 2.95 42.86 17.05 9.52 9.84 42.86 70.16 *** 2.17 4.17 20.11 18.06 10.33 11.81 67.39 65.97 .
c ) term structure risk (change in the long-term vs. short term interest rate)         4.76 9.24 9.52 2.64 9.52 12.54 76.19 75.58 . 11.70 4.90 3.72 3.50 9.57 16.08 75.00 75.52 .
g) distress risk (probability of bankruptcy)         5.00 7.57 n/a 6.25 n/a 5.26 95.00 80.59 . 5.85 9.86 6.38 7.04 5.32 4.23 82.45 78.17 .
i) “market-to-book” ratio (ratio of market value of firm to book value of assets)         n/a 3.93 4.76 1.64 n/a 7.21 95.24 87.21 . 4.23 4.26 1.06 3.55 5.29 8.51 89.42 83.69 .
j) momentum (recent stock price performance).         n/a 3.62 4.76 2.63 4.76 4.61 90.48 89.14 . 3.23 4.23 2.69 3.52 3.76 5.63 90.32 86.62 .
                                             
                                             
Table 4 (continued)                                            
When valuing a project, do you adjust either the discount rate or cash flows for the following risk factors? (Check the most appropriate box for each factor).                                            
                                             
                                             
          Public corporation Foreign sales
          Discount rate Cash Flow Both Neither Discount rate Cash Flow Both Neither
                                             
          Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No
b) interest rate risk (change in general level of interest rates)         11.84 21.01 10.09 5.88 21.49 31.09 56.58 42.02 *** 13.54 15.94 8.33 8.76 19.79 26.29 58.33 49.00 .
f) foreign exchange risk         13.00 7.32 18.39 10.57 23.32 11.38 45.29 70.73 *** 13.83 9.52 22.34 12.30 31.91 13.49 31.91 64.68 ***
d) GDP or business cycle risk         7.11 6.61 21.78 13.22 19.56 17.36 51.56 62.81 ** 6.45 7.14 26.88 15.87 16.13 19.44 50.54 57.54 .
a) risk of unexpected inflation         12.78 10.83 15.42 10.83 9.69 15.83 62.11 62.50 . 7.29 13.55 19.79 12.75 13.54 11.55 59.38 62.15 .
h) size (small firms being riskier)         14.60 14.17 5.75 6.67 11.50 17.50 67.26 61.67 . 12.77 15.02 7.45 5.53 11.70 14.23 68.09 64.43 .
e) commodity price risk         3.59 1.64 22.87 11.48 10.31 10.66 63.23 76.23 ** 3.23 2.79 26.88 15.14 10.75 10.76 59.14 71.31 **
c ) term structure risk (change in the long-term vs. short term interest rate)         7.56 10.08 4.89 1.68 11.56 15.13 76.00 73.11 . 6.45 9.52 4.30 3.57 13.98 12.30 75.27 74.60 .
g) distress risk (probability of bankruptcy)         9.73 3.33 7.52 4.17 3.98 6.67 78.32 85.83 . 9.38 6.75 7.29 5.95 2.08 5.95 81.25 80.95 .
i) “market-to-book” ratio (ratio of market value of firm to book value of assets)         5.33 1.65 2.67 0.83 4.44 12.40 87.56 85.12 . 4.26 3.95 5.32 0.79 5.32 7.91 85.11 87.35 .
j) momentum (recent stock price performance).         4.48 1.65 2.69 3.31 2.69 9.09 90.13 85.95 . 4.26 3.19 3.19 2.79 4.26 5.18 88.30 88.84 .
                                             
                                             
                                             
                                             
          Fortune 500 (using smaller sample)                  
          Discount rate Cash Flow Both Neither                  
                                             
          No Yes No Yes No Yes No Yes                  
b) interest rate risk (change in general level of interest rates)         16.60 9.50 8.30 11.10 25.50 20.60 49.70 58.70                    
f) foreign exchange risk         9.30 17.50 13.80 22.20 17.30 25.40 59.50 34.90 ***                  
d) GDP or business cycle risk         6.80 6.80 16.80 28.80 20.50 10.20 55.80 54.20                    
a) risk of unexpected inflation         12.70 8.20 12.30 24.60 11.60 13.10 63.40 54.10                  
h) size (small firms being riskier)         13.40 19.70 6.50 3.30 15.80 1.60 64.30 72.10 *                  
e) commodity price risk         2.80 3.30 15.60 34.40 10.70 11.50 70.90 50.80 ***                  
c ) term structure risk (change in the long-term vs. short term interest rate)         8.70 8.20 3.50 4.90 12.80 11.50 75.10 75.40                    
g) distress risk (probability of bankruptcy)         6.10 13.60 6.10 6.80 5.80   81.90 78.00 *                  
i) “market-to-book” ratio (ratio of market value of firm to book value of assets)         4.10 3.20 1.40 4.80 8.30 1.60 86.20 90.30                    
j) momentum (recent stock price performance).         3.10 5.00 2.40 5.00 5.50 1.70 89.00 88.30                    
a Percentage of respondents choosing each category is reported. The percentages for discount rate, cash flow, both and neither should sum to 100.                                            
***, **, * denotes a significant difference at the 1%, 5% and 10% level, respectively. All table columns are defined in Table 1.                                            

Last Updated on 5/2/00
By Campbell Harvey