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on Corporate Finance |
| By: | Jonathan Witmer; Lorie Zorn |
| Abstract: | This paper estimates the implied cost of equity for Canadian and U.S. firms using a methodology based on the dividend discount model and utilizing firms' current stock price and analysts' forecasted earnings. We find that firm size and firm stock liquidity are negatively related to cost of equity, while greater firm financial leverage and greater dispersion in analysts' earnings forecasts are associated with a higher cost of equity. Moreover, longer-term sovereign bond yields also seem to play a role in a firm's cost of equity. After controlling for several factors, both at a firm-level and at an aggregate level, we find that the cost of equity for Canadian firms is 30-50 bps higher than that of U.S. firms during 1988-2006. Because our estimates may not fully account for factors such as currency risk, inflation uncertainty, degree of market integration, personal taxes, and differences in regulatory environments, we might shed further light on these results by incorporating proxies for these factors and perhaps extending our comparison to more countries. |
| Keywords: | Financial markets; International topics |
| JEL: | G30 G38 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:07-48&r=cfn |
| By: | Flavia Cortelezzi; Giovanni Villani |
| Abstract: | Aim of this paper is to analyse the equilibrium strategies of two firms investing in a new technology, when the probability of successful implementation is uncertain and market shares are asymmetric. In particular, we are able to consider three key feature of a new technology adoption. First, it is, at least partially, irreversible. Second, once realized, there is uncertainty about the probability of a successful implementation. Third, the profit flow generated by such an investment is subject to uncertainty according to the evolution of demand function. The first firm to enter the market sustaines the investment cost earlier, but can benefit of a higher market share with respect to the competitor. The follower has just to decide if and when realize the investment. He benefits from the resolution of uncertainty, but he suffers of a reduction in its market share. Using the method of option pricing theory, we address this issue at two levels. First, we model the investment decision of a non-cooperative firm (decentralised case) as a dynamic stochastic game. Then, we solve for the sequential monopolist as a benchmark case. We find the interaction of pre-emption and uncertainty can actually hasten, rather than delay, investment, contrary to the usual presumption. |
| Keywords: | Real Options; Stopping Timing Game, Asymmetric Demand. |
| JEL: | C73 G13 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:ufg:qdsems:14-2007&r=cfn |