Agency cost of debt overhang with optimal investment timing and size

The concept of debt overhang (that is, an equity‐maximizing levered firm will under‐invest relative to a firm‐value‐maximizing firm) is well established in the literature. A number of papers have demonstrated it as delayed investment (when investment size is specified) or smaller investment (when investment time is specified). However, there is no work on the underinvestment effect when the firm chooses both size and timing of investment, as it usually does in real life. This is what our paper focuses on. When the firm has the flexibility to choose both size and time, the effect is complicated by the fact that delayed investment results in larger investment, which suggests that the underinvestment problem might be mitigated. We find, however, that the effect depends on how underinvestment is measured. When measured by the expected present value of investment, flexibility can mitigate or exacerbate the underinvestment problem, depending on the cost of installing capacity. But when measured by the agency cost, flexibility always exacerbates the underinvestment problem. It is shown numerically that, at the optimal leverage ratio, the agency cost with plausible parameter values can be economically significant. Thus, with the flexibility of choosing both time and size of investment, the debt overhang problem can be of significant practical relevance in corporate investment decisions.     

FALLACY OF NONLIFE SAVINGS FROM INVESTED DIFFERENCE

Abstract: Usually nonlife savings with term life produce better investment results compared to the cash value in whole life insurance. This paper addressed a potential problem of the former that its balance may decrease during the later years, if the rate of return is relatively low. To fully reveal this declining property to the investors, it is recommended that the investment performance of nonlife savings be disclosed over a 50–year period at 5 and 8 percent returns. Further discussions are delivered regarding similarities and differences between nonlife savings and the cash values under universal and variable life insurance.     

The Investment Portfolio of the Life Insurance Industry in China: Peculiar Constraints and the Specialist Problem

This article describes the particular investment and legal constraints on the life insurance investment portfolio in China (the "Portfolio") and investigates the specialist problem. The "specialist problem" is here defined as an agency problem as in information economics. In September 2004, the China Insurance Regulatory Commission ("CIRC") announced that three of the four largest life insurance companies in China could not meet the mandatory capital adequacy requirement. The author found that although it is harder to manage the Portfolio because of the peculiar constraints, the main characteristic of the poor performance of the Portfolio—failing to meet the capital requirement—is due to the specialist problem, which is mainly due to the controlled economic system. In conclusion, the author suggests specialists and risk management strategies that can be implemented in China with immediate effect, taking into consideration data deficiency and the difficulty of contract enforcement in China.     

The impact of a partial borrowing limit on financial decisions

We consider a consumption, investment, life insurance, and retirement decision problem in which an economic agent is allowed to borrow against only a part of future income. The closed-form solution is attained by applying a dual approach that directly imposes the conditions for the borrowing limit on a dual value function. We provide analytic comparative statics for optimal strategies with rigorous proofs. It is confirmed that a more stringent borrowing limit leads to less consumption and less life insurance purchase. However, even with a tighter borrowing limit, an agent with weak incentive to retire can invest more when the wealth level is high enough. We also show that a more stringent borrowing limit can delay or hasten the optimal retirement timing depending on the agent's current wealth level.     

The investment decision with technological and market uncertainties

This paper examines how technological uncertainty affects current investment; specifically, what is the impact on a firm’s investment in an existing technology when an improved technology might arrive in the future. The firm can invest in the current technology and upgrade to the new technology after its arrival (sequential investing), or it can bypass the current technology and invest directly in the new technology (leapfrogging). The main result is that, in the presence of market risk, future technological uncertainty has a non-monotonic effect on investment, with the investment trigger being a U-shaped function of the expected speed of arrival of the new technology. In this U-shaped relationship, the investment trigger starts rising later if the new technology is more attractive and also when volatility and interest rate are high and growth rate low; thus, technological uncertainty is more likely to have a positive effect on investment under these conditions. Finally, we apply the model to the sequential versus leapfrog investment decision, and find that leapfrogging becomes more attractive relative to sequential investment when interest rate and new technology earnings enhancement are higher, and when market volatility, growth rate and new technology investment cost are lower.     

The Relationship between Investment and Asset Life

Optimal investment in an asset and its optimal life are shown to be interrelated through operating cash flows and depreciation allowance, as well as book and salvage values upon termination; thus they are determined simultaneously. Asset life and investment are positively (negatively) related if delaying abandonment increases (reduces) the benefit of marginal investment. If investment and asset life are positively related, increased debt financing or allowable depreciation positively impact on them; otherwise, the impact is ambiguous in sign. Further, investment in a zero salvage value asset and its holding period increase with depreciation or leverage when (1) its cash flows form an annuity or (2) the firm employing it is tax-exempt.     

Earnings Momentum,Adaptation Value,and Nonlinearities in the Valuation of Chinese Equity Stocks

We demonstrate that when the variables comprising a firm's investment opportunity set depend on their past values then the present value of the cash flows the firm expects to earn will be stated in terms of the levels and the momentum of the affected variables. It is also shown that the market value of a firm's equity is comprised of the present value of the cash flows it expects to earn from operating under its existing investment opportunity set plus the value of the real options the firm possesses to modify or even completely change its existing investment opportunity set. Our empirical analysis, based on both Chinese and US data, shows that earnings momentum and the adaptation and growth options typically available to firms all appear to have a significant impact on equity prices.     

Unobserved investment,endogenous quality,and trade

A seller can make investments that affect a tradable asset’s future returns. The potential buyer of the asset cannot observe the seller’s investment prior to trade, nor does he receive any signal of it, nor can he verify it in any way after trade. Despite this severe moral‐hazard problem, this article shows the seller will invest with positive probability in equilibrium and that trade will occur with positive probability. The outcome of the game is sensitive to the distribution of bargaining power between the parties, with a holdup problem existing if the buyer has the bargaining power. A consequence of the holdup problem is surplus‐reducing distortions in investment level. Perhaps counterintuitively, in many situations, this distortion involves an increase in the expected amount invested vis‐à‐vis the situation without holdup.     

Why firms issue callable bonds: Hedging investment uncertainty

This paper analyzes a firm's dynamic decisions: i) whether to issue a callable or non-callable bond; ii) when to call the callable bond; and iii) whether to refund it when it is called. We argue that a firm uses a callable bond to reduce the risk-shifting problem in case its investment opportunities become poor. Our empirical findings support this argument. We find that a firm facing poorer future investment opportunities is more likely to issue a callable bond than a firm facing better investment opportunities. In addition, a firm with a higher leverage ratio and higher investment risk is more likely to issue a callable bond. Finally, after a callable bond is issued, a firm with a poor performance and a low investment activity tends to call back a bond without refunding; a firm with the best performance and highest investment activity tends to call back a bond and refund its call; and a firm with mediocre performance and investment activity tends to not call its bonds.     

The bright and dark side of staging: Investment performance and the varying motivations of private equity firms

Previous papers that examined investment decisions by private equity funds are divided on whether staging has a positive or negative effect on returns. We believe these opposing views can be reconciled by studying when staging is used during the life of the investment relationship: We find that staging has a positive effect on investment returns in the beginning of the investment relationship, consistent with the notion that staging helps mitigate information asymmetry. However, staging appears to be negatively associated with returns when used prior to the exit decision. Our unique dataset allows us to measure these intertemporal effects precisely.     

税率锚定效应与企业投资决策

已有文献证实了高管过度自信等非理性因素对企业投资决策的影响,但尚未有文献研究锚定心理在投资决策中的作用。税收政策连续性不足会使得企业实际税率充满不确定性,高管在预测未来实际税率时很可能会非理性地锚定当期的高税率,进而产生税率锚定行为。本文研究这种非理性的税率锚定行为对企业投资决策的影响,结果发现:企业投资决策中存在显著的税率锚定行为,对高税率的锚定显著降低了企业未来的投资支出,且内在锚效应(纵向对比)强于外在锚效应(横向对比)。进一步地,我们发现经验更丰富的高管有助于缓解投资中的税率锚定效应,但更大的税率波动性加剧了这种效应,最终降低了公司业绩和价值。本文研究表明,控制投资中的税率锚定行为,有利于提高投资效率和企业价值,同时也表明保持宏观税收政策连续性有利于促进企业健康可持续发展。     

Motivating managers to make investment decisions

Owners of capital frequently lack knowledge about investment opportunities. One alternative is to turn to a manager for assistance. The owner's problem of contracting for the services of a manager is treated as a problem in buying information. The surprising result is that it is sometimes possible to trade information even when the owner is unable to form his own assessment of the information's value. Under some conditions it is possible to write a managerial compensation contract which will induce the manager to act in the best interests of the owner. These conditions require owner knowledge of the manager's employment and investment alternatives and risk preferences as well as some, but not all, of the characteristics of the investment opportunities.     

Correspondence between lifetime minimum wealth and utility of consumption

We establish when the two problems of minimizing a function of lifetime minimum wealth and of maximizing utility of lifetime consumption result in the same optimal investment strategy on a given open interval O in wealth space. To answer this question, we equate the two investment strategies and show that if the individual consumes at the same rate in both problems—the consumption rate is a control in the problem of maximizing utility—then the investment strategies are equal only when the consumption function is linear in wealth on O, a rather surprising result. It then follows that the corresponding investment strategy is also linear in wealth and the implied utility function exhibits hyperbolic absolute risk aversion.      

Lifetime asset allocation with idiosyncratic and systematic mortality risks

This paper considers a lifetime asset allocation problem with both idiosyncratic and systematic mortality risks. The novelty of the paper is to integrate stochastic mortality, stochastic interest rate and stochastic income into a unified framework. An investor, who is a wage earner receiving a stochastic income, can invest in a financial market, consume part of his wealth and purchase life insurance or annuity so as to maximize the expected utility from consumption, terminal wealth and bequest. The problem is solved via the dynamic programming principle and the Hamilton–Jacobi–Bellman equation. Analytical solutions to the problem are derived, and numerical examples are provided to illustrate our results. It is shown that idiosyncratic mortality risk has significant impacts on the investor’s investment, consumption, life insurance/annuity purchase and bequest decisions regardless of the length of the decision-making horizon. The systematic mortality risk is largely alleviated by trading the longevity bond. However, its impacts on consumption, purchase of life insurance/annuity and bequest as well as the value function are still pronounced, when the decision-making horizon is sufficiently long.     

Optimal Leverage and Aggregate Investment

We analyze the optimal financing of investment projects when managers must exert unobservable effort and can also switch to less profitable riskier ventures. Optimal financial contracts can be implemented by a combination of debt and equity when the risk-shifting problem is the most severe while stock options are also needed when the effort problem is the most severe. Worsening of the moral hazard problems leads to decreases in investment and output at the macroeconomic level. Moreover, aggregate leverage decreases with the risk-shifting problem and increases with the effort problem.     

基金投资行为能够预测经济吗？ ——基于宏观、中观、微观三个层面的实证检验

股市作为经济的晴雨表,基金因其投资行为的专业化被投资者所青睐,那么股票型基金在构建投资组合时是否会依据实体经济呢？本文从宏观、中观和微观三个层面,通过构建非平衡动态面板模型,实证检验我国基金超常规发展与经济增长之间的关系,以及基金投资行为对经济增长的预测作用。研究结果显示：从宏观层面来看,基金发展规模和机构投资者持股比例的增加与经济增长之间存在负相关关系;从行业层面来看,基金的行业持仓增加,则经济预期出现向好局面,表明基金具有一定的经济预判能力;从微观层面来看,预期经济上涨向好趋势时,基金管理人会在当期减持投资组合内的股票,并选择配置更多新股以寻求新的经济增长投资机会,这表明基金投资行为对经济增长具有一定的预测作用。     

Information and the hold‐up problem

We examine situations in which a party must make a sunk investment prior to contracting with a second party to purchase an essential complementary input. We study how the resulting hold‐up problem is affected by the seller's information about the investing party's likely returns from its investment. Our principal focus is on the effects of the investment's being observable by the noninvesting party. We establish conditions under which the seller's ability to observe the buyer's investment harms the seller, benefits the buyer, and reduces equilibrium investment and total surplus. We also note conditions under which investment and welfare rise when investment is observable.     

投资连结保险产品设计及推广分析

投资连结保险的产品设计独特,将其保障功能与投资功能分开,一方面为消费者提供了调整保险和投资计划的便利,另一方面也使之与资本市场的走势密切相关。我国寿险市场上的供给方存在资本市场繁荣时过多引导消费者关注投资收益,边缘化其保险功能的问题;需求方则由于对投资连结保险产品收益的刚性预期,不能接受产品收益下降的情况。两方面共同的结果是导致投资连接保险成为寿险市场上的不稳定因素。为促使投资连接保险在我国的健康发展,应当强调投资连接保险的保障功能;针对销售导向进行实质的约束;利用税收对市场进行引导等。     

The Q Theory of Housing Investment

This paper presents estimates of a Q model of housing investment, using quarterly data for the United States. The empirical model is estimated using building permits, housing starts, and housing investment expenditures as measures of investment. The current and lagged values of the Q ratio are found to be positively and significantly associated with housing investment, whichever way investment is measured. The findings suggest that the housing market indeed functions as Tobin has theorized. Housing suppliers appear to respond to the demands of housing consumers, building more new homes when existing home prices are high relative to new home prices.     

Investment,idiosyncratic risk,and growth options

We provide evidence that growth options play an important role in determining the negative relation between corporate investment and idiosyncratic risk in the absence of agency problem. A simple real options model predicts that the negative relation between corporate investment and idiosyncratic risk is a U-shaped function of the level of idiosyncratic risk: investment responds the most when idiosyncratic risk is at the intermediate level. And the negative relation is stronger when firms possess more growth options. Our results are robust when we control for the effect of managerial risk aversion, supporting the view that firms’ optimal response to uncertainty is an important driving force behind the negative investment–idiosyncratic risk relation.