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on Corporate Finance |
| By: | Giovanni Villani |
| Abstract: | This paper provides a real option methodology for evaluating R&D investment opportunities assuming that potential competitors can en- ter in the market. As it is well known, R&D investments are made often in a phased manner and so each stage creates an opportunity (option) for subsequent investment. Therefore, R&D projects can be consid- ered as ‘Compound Exchange Options' in which investments present uncertainty both in the gross project value and in costs. According to Majd and Pindyck (1987), in a real options context, “div- idends” are the opportunity costs inherent in the decision to defer an investment project and so deferment implies the loss of project's cash flows. Moreover, Trigeorgis (1996) incorporates the preemption effect through the “competitive dividends” which are the cash flows that can be eroded by anticipated competitive arrivals. In this paper we propose to value, using Montecarlo simulation, the R&D investments of a pioneer firm assuming that the Development cost can be spent in two moments: t2 or t3. If the Develpment cost is realized in t2 no firms enters in the market since the rivals' R&D plan is not yet concluded otherwise, if the investment D is delayed at time t3 waiting better market conditions, other rivals can enter in the market and so the opportunity costs (“dividends”) increase. |
| Keywords: | Real options; R&D; Monte Carlo methods; Competitive dividends. |
| JEL: | G13 O32 C15 D40 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ufg:qdsems:21-2009&r=cfn |
| By: | Francesca Cornelli (London Business School and the Center for Economic Policy Research); Zbigniew Kominek; Alexander Ljungqvist (New York University's Stern School of Business and CEPR) |
| Abstract: | We test under what circumstances boards discipline managers and whether such interventions improve performance. We exploit exogenous variation due to the staggered adoption of corporate governance laws in formerly communist countries coupled with detailed “hard” information about the board’s performance expectations and “soft” information about board and CEO actions and the board’s beliefs about CEO competence in 473 mostly private sector companies backed by private equity funds between 1993 and 2008. We find that CEOs are fired when the company underperforms relative to the board’s expectations, suggesting that boards use performance to update their beliefs. CEOs are especially likely to be fired when evidence has mounted that they are incompetent and when board power has increased following corporate governance reforms. In contrast, CEOs are not fired when performance deteriorates due to factors deemed explicitly to be beyond their control, nor are they fired for making “honest mistakes”. Following forced CEO turnover, companies see performance improvements and their investors are considerably more likely to eventually sell them at a profit. |
| Keywords: | Corporate governance, large shareholders, boards of directors, CEO turnover, legal reforms, transition economies, private equity. |
| JEL: | G34 G24 G32 K22 O16 P21 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:ebd:wpaper:110&r=cfn |
| By: | Pustovalova, Tatiana A. |
| Abstract: | Over the past decade, commercial banks have devoted many resources to developing internal models to better quantify their financial risks and assign economic capital. These efforts have been recognized and encouraged by bank regulators. Recently, banks have extended these efforts into the field of credit risk modeling. The Basel Committee on Banking Supervision proposes a capital adequacy framework that allows banks to calculate capital requirement for their banking books using internal assessments of key risk drivers. Hence the need for systems to assess credit risk. In this work, we describe the case of successful application of VAR methodology for credit risk estimation. Executive summary is available at pp. 32. |
| Keywords: | banking, credit risk, default, Basel 2, value of risk, |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:sps:wpaper:104&r=cfn |
| By: | Mohd, Irfan |
| Abstract: | This paper proposes a two-stage game theoretic model in which the discretionary power of executives acts as an implicit defense against hostile takeovers. Following managerial enterprise models, this paper analyzes the effects of target’s executives’ discretionary power over R&D and advertising in defeating hostile takeover attempts. It is shown that in vertically differentiated industries, in equilibrium, target’s executive keep low level of R&D and advertising to make their firm an unattractive target for hostile takeovers. The model reveals that the executives are influenced by their self-interest of monetary and non-monetary benefits and this self-interest behavior makes the industry less differentiated. Additionally, the firm’s takeover (hostile or friendly) is endogenously determined by the executives. |
| Keywords: | Executives Discretion; Hostile Takeovers; Vertical Differentiation; R&D; Advertising |
| JEL: | G34 L15 |
| Date: | 2010–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22123&r=cfn |