Measuring Value‐at‐Risk in Project Finance Transactions

Despite the remarkable importance of project finance in international financial markets, no quantitative models to measure and quantify the risk associated with a deal for the project's lenders have been developed yet. The topic has recently become crucial, since the New Basle Capital Accord gives banks a choice of whether to adopt simpler (but possibly higher) standard capital requirements or to develop internal rating models for project finance transactions. The paper proposes how Monte Carlo simulations may be used to derive a Value‐at‐Risk estimate for project finance deals and discusses the critical issues that must be considered when developing such a model.     

Understanding the exploration–exploitation dilemma: An fMRI study of attention control and decision‐making performance

This paper studies the cognitive processes that enable decision makers to switch between exploitation and exploration. We use functional magnetic resonance imaging (fMRI) in a sample of expert decision makers to make two main contributions. First, we identify and contrast the specific brain regions and cognitive processes associated with exploitation and exploration decisions. Exploitation activates regions associated with reward seeking, which track and evaluate the value of current choices, while exploration relies on regions associated with attentional control, tracking the value of alternative choices. Second, we propose and test the idea that stronger activation of the brain circuits related to attentional control allows individuals to achieve better decision‐making performance as a result. We discuss the implications of these results for strategic management research and practice. Copyright © 2013 John Wiley & Sons, Ltd     

Licensing Under Bertrand Competition Revisited

This note indicates that the derivation of the royalty contract for licensing in Wang and Yang (Australian Economic Papers, 39 (1999) 106–119) is not correct. As a consequence, the profits of the innovator in the case of royalty licensing are underestimated.     

Small local firms inside the supply chain: Challenges and perspectives

The authors provide the results of an empirical research carried out in north-east Italy and completed in 1992, which was aimed at investigating the rapport between large manufacturers operating on the multidomestic and global markets and the small local supplying concerns. This research identifies that the globalization process has had a strong impact in the relations with suppliers. The purchasing firms have adopted a particular approach when selecting the suppliers. This has involved widening their previous geographic areas of contact, even making use of foreign sources. Consequently, the local micro units either will become excluded from future business relations with the purchasing organizations, or will be relegated into lower levels of the supply chain. Today small and very small units working as suppliers with direct link with large-scale clients, face many challenges: they should now renew their know-how and skills, develop a new managerial and organizational sense, and recognise the need to invest in new forms other than machinery and processes. The empirical study clearly showed both the limits and the structural weakness of such small units and provided some indications for growth in their technical-productive potential.     

The best-shot all-pay (group) auction with complete information

We analyze an all-pay group contest in which individual members’ efforts are aggregated via the best-shot technology and the prize is a public good for the winning group. The interplay of within-group free-riding and across-group competition allows for a wide variety of equilibria, according to how well groups overcome internal free-riding. In contrast with the existing literature, we derive equilibria of a symmetric model in which multiple agents per group are active. Our findings differ qualitatively from those of the individualistic all-pay auction: rents are not necessarily dissipated in equilibrium, total expected efforts vary across equilibria, and participation is expected to be greater. Moreover, equilibria with greater symmetry of behavior within a group are shown to have more “wasted” effort but also greater payoffs as overall efforts are lower. In contrast to standard economic intuition, free-riding can be beneficial for players as it reduces competition among groups. Examples of asymmetric group contests are also studied.     

Innovation and finance: a stock flow consistent analysis of great surges of development

The present work aims at contributing to the recent stream of literature which attempts to link the Neo-Schumpeterian/Evolutionary and the Post-Keynesian theory. The paper adopts the Post-Keynesian Stock Flow Consistent modeling approach to analyze the process of development triggered by the emergence of a new-innovative productive sector into the economic system. The model depicts a multi-sectorial economy composed of consumption and capital goods industries, a banking sector and two households sectors: capitalists and wage earners. Furthermore, it provides an explicit representation of the stock market. In line with the Schumpeterian tradition, our work highlights the cyclical nature of the development process and stresses the relevance of the finance-innovation nexus, analyzing the feed-back effects between the real and financial sides of the economic system. In this way we aim at setting the basis of a comprehensive and coherent framework to study the relationship between technological change, demand and finance along the structural change process triggered by technological innovation.     

Asset pricing and the role of macroeconomic volatility

Standard Real Business Cycle (RBC) models are well known to generate counter-factual asset pricing implications. This study provides a simple extension to the prior literature by studying an economy that follows a regime-switching process in conjunction with Epstein–Zin preferences for consumers. We provide a detailed theoretical and numerical analysis of the model’s predictions. We also show that a reasonable parameterization of our model conveys financial figures in line with US postwar data. Furthermore, we provide evidence in support of modeling a regime-dependent macroeconomic risk.     

Relationship Lending and Credit Quality

We analyse whether relationship lending reduces borrowers’ probability of default and, if so, whether this beneficial effect also applies to borrowers who are more exposed to the economic downturn. By using unique, matched data of 43,000 firms and their lending institutions between 2008 and 2010, we document that the probability that a firm becomes distressed decreases if the creditor concentration is high and if the duration of bank-firm relationships is long. While these results appear to support the beneficial effect of relationship lending practices, we note that the organisational distance of banks also matters both as a determinant of loan distress and loan downgrading. The results are stronger for smaller firms.