nep-cfn New Economics Papers
on Corporate Finance
Issue of 2009‒09‒19
five papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Decision time in Belgium: an experiment as to how business angels evaluate investment opportunities By Joël Ludvigsen
  2. Optimal Farm Size under an Uncertain Land Market: the Case of Kyrgyz Republic By Scandizzo, Pasquale Lucio; Savastano, Sara
  3. Analytical Approximations for the Critical Stock Prices of American Options: A Performance Comparison By Minqiang Li, Li
  4. Risk Aversion and Clientele Effects By Douglas W. Blackburn; William N. Goetzmann; Andrey D. Ukhov
  5. Technological Growth and Asset Pricing By Nicolae B. Gârleanu; Stavros Panageas; Jianfeng Yu

  1. By: Joël Ludvigsen (Centre Emile Bernheim, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels.)
    Abstract: To what extent do business angels really understand their own decision process? This paper is the first in business angel research literature to use conjoint analysis to capture decision makers’ actual decision policies and to compare these results with their stated decision policies. Although more than twenty papers discussing the decision criteria of business angels have been published, most of these studies rely on post hoc methodologies (e.g. interviews and surveys) to capture the decision process. Post hoc methods assume that business angels can accurately introspect about their own decision processes, but studies from cognitive psychology suggest that decision makers are poor at introspecting. In addition, experiments in the venture capital industry have shown that venture capitalists are poor at introspecting and do not fully understand their decision processes. Taking cues from cognitive psychology, this paper starts with the hypothesis that, like venture capitalists, business angels do not fully understand their own decision processes. To test this hypothesis, an experiment including twenty-four Belgian business angels and using conjoint analysis is performed. The findings suggest that business angels are not good at introspecting about their own decision processes. Even within the confines of a controlled experiment, which greatly reduces the amount of information considered, business angels lacked strong understanding of how they made decisions.
    Keywords: business angels, decision making, entrepreneurial finance, investment evaluation, conjoint analysis
    JEL: G24 G11 M13
    Date: 2009–09
  2. By: Scandizzo, Pasquale Lucio; Savastano, Sara
    Abstract: The paper illustrates a theoretical model of real option value applied to the problem of land development. Making use of the 1998-2001 Kyrgyz Household Budget Survey, we show that when the hypothesis of decreasing return to scale holds, the relation between the threshold value of revenue per hectare and the amount of land cultivated is positive. In addition to that, the relation between the threshold and the amount of land owned is positive in the case of continuous supply of land and negative when there is discontinuous supply of land. The direct consequence is that, in the first case, smaller farms will be more willing to rent land and exercise the option where, in the second case, larger farms will exercise first. The results corroborate the findings of the theoretical model and suggest three main conclusions: (i) the combination of uncertainty and irreversibility is a significant factor in the land development decisions, (ii) farmersâ behaviour is consistent with the continuous profit maximization model, (iii) farming unit revenue tends to be positively related to farm size, once uncertainty is properly accounted for.
    Keywords: Option value theory, Farm size, Uncertainty, irreversibility, Agricultural and Food Policy, Land Economics/Use, Resource /Energy Economics and Policy, O13, Q12, Q15, Q18,
    Date: 2009–08–20
  3. By: Minqiang Li, Li
    Abstract: Many e±cient and accurate analytical methods for pricing American options now exist. However, while they can produce accurate option prices, they often do not give accurate critical stock prices. In this paper, we propose two new analytical approximations for American options based on the quadratic approximation. We compare our methods with existing analytical methods including the quadratic approximations in Barone-Adesi and Whaley (1987) and Barone-Adesi and Elliott (1991), the lower bound approximation in Broadie and Detemple (1996), the tangent approximation in Bunch and Johnson (2000), the Laplace inversion method in Zhu (2006b), and the interpolation method in Li (2008). Both of our methods give much more accurate critical stock prices than all the existing methods above.
    Keywords: American option; Analytical approximation; Critical stock price
    JEL: C63 C02 G13
    Date: 2009
  4. By: Douglas W. Blackburn; William N. Goetzmann; Andrey D. Ukhov
    Abstract: We use traded options on growth and value indices to test for clientele differences in risk preferences. Value investors appear to have exhibited a higher average level of risk aversion than growth investors for two different time periods in the late 1990’s and early 2000’s. We construct a model of time-varying clientele preferences that allows investors with different levels of risk-aversion to switch between investment styles conditional upon the evolution of returns and risk. The model makes predictions about the autocorrelations structure of measured risk parameters and also about the autocorrelation and cross-autocorrelation of fund flows by style. Empirical tests of the model provide evidence consistent with the existence of style switchers—investors who move funds between growth and value securities. We construct trading strategies in the value and growth index options markets that effectively buy risk from one clientele and sell it to another. These strategies generated modest positive returns over the period of study.
    JEL: D01 G11 G12
    Date: 2009–09
  5. By: Nicolae B. Gârleanu; Stavros Panageas; Jianfeng Yu
    Abstract: In this paper we study the implications of general-purpose technological growth for asset prices. The model features two types of shocks: "small", frequent, and disembodied shocks to productivity and "large" technological innovations, which are embodied into new vintages of the capital stock. While the former affect the economy on impact, the latter affect the economy with lags, since firms need to first adopt the new technologies through investment. The process of adoption leads to cycles in asset valuations and risk premia as firms convert the growth options associated with the new technologies into assets in place. This process can help provide a unified, investment-based view of some well documented phenomena such as the asset-valuation patterns around major technological innovations, the countercyclical behavior of returns, the lead-lag relationship between the stock market and output, and the increasing patterns of consumption-return correlations over longer horizons.
    JEL: E22 G12
    Date: 2009–09

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