Firm Value, Risk, and Growth Opportunities

We show that Tobin's q, as proxied by the ratio of the firm's market value to its book value, increases with the firm's systematic equity risk and falls with the firm's unsystematic equity risk. Further, an increase in the firm's total equity risk is associated with a fall in q. The negative relation between the change in total risk and the change in q is robust through time for the whole sample, but it does not hold for the largest firms.