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 reported^a

	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