Stock Market Cycles – A Practical Explanation : [PDF Download]

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“A change in business risk changes, in turn, the common stock price. An increase in business risk for the expected earnings reduces the common stock price. A decrease in business risk for the expected earnings increases the common stock price.

The common stock price changes in response to a change in business risk even if the expected earnings remain the same. A change in business risk implies that the probability of the company actually achieving expected earnings has changed, not that the expected earnings have actually changed.

There is a higher or lower probability expected earnings would be realized. Business risk in the denominator of the Equation (3) valuation framework has changed, and in turn, the present value of the expected earnings has changed.”

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