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on Project, Program and Portfolio Management |
| By: | Eliasson, Jonas; Fosgerau, Mogens |
| Abstract: | A number of highly cited papers by Flyvbjerg and associates have shown that ex ante infrastructure appraisals tend to be overly optimistic. Ex post evaluations indicate a bias where investment costs are higher and benefits lower on average than predicted ex ante. These authors argue that the bias must be attributed to intentional misrepresentation by project developers. This paper shows that the bias may arise simply as a selection bias, without there being any bias at all in predictions ex ante, and that such a bias is bound to arise whenever ex ante predictions are related to the decisions whether to implement projects. Using a database of projects we present examples indicating that the selection bias may be substantial. The examples also indicate that benefit-cost ratios remains a useful selection criterion even when cost and benefits are highly uncertain, gainsaying the argument that such uncertainties render cost-benefit analyses useless. |
| Keywords: | cost overruns; cost escalation; forecast accuracy; cost-benefit analysis; appraisal; selection bias; winner’s curse |
| JEL: | H4 H43 L2 R4 R42 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:49744&r=ppm |
| By: | Rohlfs, Wilko (RWTH Aachen University); Madlener, Reinhard (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN)) |
| Abstract: | The economic evaluation of ultra-long-lived investment projects is not only challenging due to the choice of the planning horizon but also due to the discounting of future uncertain cash flows. Thus, for real world investment decisions a better understanding of the project’s risks and their effect on the project’s value is crucial. If long-term investments are modeled, stochastic processes may be used to reflect the uncertain development of future prices and cash flows. The choice of the stochastic process is consequently an essential assumption in the modeling process. This paper critically discusses the risk of ultra-long-lived investment projects implied if future pay-off’s are assumed to follow geometric Brownian motion processes. In our analysis, we distinguish between projects driven by costs and such driven by revenues. For both kind of projects we compare the value at risk with the returns of a risk-free asset. Therein, the value at risk describes the threshold value of the confidence levels of the uncertain cash flow’s probability density function. The comparison for long time horizons shows that the lower confidence interval exceeds the returns of a risk-free asset used as a benchmark for any choice of the confidence level, which implies that the returns of a “worst-case” scenario (within the assumed confidence interval) will still exceed the returns of a risk-free asset in the long-term perspective. For the case of uncertain future cost, the risk measure is defined as the difference between the expected value and the boundary of the confidence interval. This value is also found to become negative in the long-term perspective. |
| Keywords: | Ultra-long-lived projects; discounting; risk evaluation |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:ris:fcnwpa:2013_013&r=ppm |
| By: | Ishida, Souhei; Ito, Kunio |
| Abstract: | We examine how two types of conservatism—conditional conservatism and unconditional conservatism—affect corporate investment behavior. Conditional conservatism forces managers to recognize the loss resulting from an investment project on a timely basis. When risk-averse managers are aware that their reputation and compensation are affected adversely by recognizing the loss resulting from project failure, they are less likely to undertake the project ex ante despite its positive net present value (NPV). Thus, conditional conservatism probably inhibits corporate investment behavior. In contrast, unconditional conservatism mitigates a firm’s earning volatility, especially downward volatility, by providing an accounting slack. Thus, it is likely that unconditional conservatism promotes corporate investment behavior. Using a large sample of Japanese companies, we empirically analyze how conditional conservatism and unconditional conservatism affect corporate investment behavior. These results suggest that although firms with higher conditional conservatism take more negative investment initiatives, those firms with higher unconditional conservatism take more positive investment initiatives. |
| Keywords: | Conservatism, Conditional Conservatism, Unconditional Conservatism, Corporate Behavior, Capital Investment |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hjbswp:175&r=ppm |