Differential Estimation Risk and Firm Value: A Commentary

Abstract

‘This paper discusses the differential estimation risk model and its two risk components: information risk and stochastic parameter risk. If estimation risk is being systematically priced by investors in the financial markets, investors would require a isk premium to compensate themselves for bearing estimation risk. Assets are therefore traded at a discount off their true values that would be realised if all price-sensitive information is made available. Initial public offerings are one such example of high information risk assets that offer successful subscribers significant isk premium on the frst trading day. The differential estimation risk model has significant implications for disclosure requirements in the regulation of Asian financial markets as well a the production of information in these economies.