Investment in organization capital

We study a firm’s investment in organization capital by analyzing a dynamic model of language development and intrafirm communication. We show that firms with richer internal language (i.e., more organization capital) have lower employee turnover, and higher diversity in skill and wages among incumbents who are promoted from within the firm. Our results also suggest that firms in rapidly changing industries are less likely to invest in organization capital, and are more likely to have high managerial turnover. Finally, our model shows that employment protection regulations lead to more investment in organization capital but less innovation.     

What is different about international lending?

An attempt is made to explain how enforceability is achievedin international debt contracts. Each bank announces the policyof denying credit to borrowers who default and chooses to adhereto it to maintain its reputation of being a tough bank to disciplineits other borrowers. Loans are made by syndicates of banks inorder to make the penalty for default severe enough so borrowerswould choose not to default voluntarily. The model predictsthat the interest rate charges on loans is smaller for the largerborrowers. Also, for any given borrower, the interest rate mayfall after each successive default.     

Corporate Risk Management for Multinational Corporations: Financial and Operational Hedging Policies

Under what conditions will a multinational corporation alterits operations to manage its risk exposure? We show that multinationalfirms will engage in operational hedging only when both exchangerate uncertainty and demand uncertainty are present. Operationalhedging is less important for managing short-term exposures,since demand uncertainty is lower in the short term. Operationalhedging is also less important for commodity-based firms, whichface price but not quantity uncertainty. When the fixed costsof establishing a plant are low or the variability of the exchangerate is high, a firm may benefit from establishing plants inboth the domestic and foreign location. Capacity allocated tothe foreign location relative to the domestic location willincrease when the variability of foreign demand increases relativeto the variability of domestic demand or when the expected profitmargin is larger. For firms with plants in both a domestic andforeign location, the foreign currency cash flow generally willnot be independent of the exchange rate and consequently theoptimal financial hedging policy cannot be implemented withforward contracts alone. We show that the optimal financialhedging policy can be implemented using foreign currency calland put options and forward contracts.     

Problems of R&D manpower in India

Abstract
Manpower Planning is important in R&D organizations. If one examines the budget of a research institute in any part of the world, one would find that 60–70% of the expenditure is incurred on staff salaries and benefits. Of course, manpower planning is beset with problems. This paper deals with: (i) lack of literature; (ii) scientific manpower statistics; (iii) recruitment; (iv) unemployment of S&T personnel; (v) brain drain; (vi) internal brain drain; and (vii) suggestions.     

Development and freedom as risk management

Amartya Sen has argued that many development and freedom measures such as health, education, political and civil liberties are important constituents of human welfare. We concur with Sen and conjecture that an important reason these measures affect human welfare is because they allow individuals to better cope with risk and uncertainty that cannot be hedged using market based insurance mechanisms. We find some empirical support for this conjecture in that the volatility of consumption growth appears to be negatively related to life expectancy, political rights, and property rights (but is positively related to the rate of literacy) after controlling for the size of the country, per capita income, and openness to trade and capital flows, (which, as one would expect, also reduce consumption growth volatility) in cross-country panel regressions.     

Growth Options, Beta, and the Cost of Capital

We show how to decompose a firm's beta into its beta of assets-in-place and its beta of growth opportunities. Our empirical results demonstrate that the beta of growth opportunities is greater than the beta of assets-in-place for virtually all industries over all periods of time dating back to 1977. The difference has important implications for determining the cost of capital. For example, when choosing comparables to determine a project beta one should match the growth opportunities of the project with those of the comparable firm. Assuming a 6% market equity risk premium, accounting for growth opportunities alters the project cost of capital by as much as 2% to 3%.     

Repurchase premia as a reason for dividends: a dynamic model of corporate payout policies

We propose that it is precisely because firms' repurchases oftheir own stock through tender offers are associated with largestock-price increases that repurchases are unattractive as ameans o distributing cash. As a result, firms distribute somecash in the form of dividends - despite the tax disadvantage- and carry the rest to future periods. However, when theirstock is sufficiently undervalued, firms distribute all accumulatedcash through stock repurchases. We show that dividends are smoothedand are positively related both to earnings innovations andto previous period's dividends. Also, the stock-price reactionto a repurchase announcement, of a given size, is increasingin the previous period's dividends.     

Assessing Project Risk

Finding the appropriate discount rate, or cost of capital, for evaluating investment projects requires an accurate estimate of project risk. This can be challenging because project risk cannot be estimated directly using the CAPM, but must instead be inferred from a set of traded securities, typically the equity betas of comparable firms in the same industry. These equity betas are then unlevered to undo the effect of comparable companies' financial leverage and obtain estimates of “asset” betas, which are then used to estimate project risk. The authors show that asset betas estimated in this way are likely to overestimate project risk. The equity returns of companies are risky not only because of their existing projects but also because of their growth opportunities. Such growth opportunities often include embedded “real options,” such as the option to delay, expand, or abandon a project. Because such real options are similar to leveraged positions in the underlying project, a company's growth opportunities are typically riskier than its existing projects. Therefore, to properly assess project risk, analysts must also unlever the asset betas derived from comparable company stock returns for the leverage contributed by their growth options. The authors derive a simple method for unlevering asset betas for growth options leverage in order to properly assess project risk. They then show that standard methods for assessing project risk significantly overestimate project costs of capital—by as much as 2–3% in industries such as healthcare, pharmaceuticals, communications, medical equipment, and entertainment. Their method should also be applied to stock return volatility to derive project volatility, an important input for determining the value of a firm's growth opportunities and the appropriate time for investing in these opportunities.