Accelerated investment effect of risky debt

In this paper we examine a new effect of risky debt on a firm’s investment strategy. We call this effect “accelerated investment”. It stems from a potential loss of investment option in the event of default. The possibility of default reduces the value of the option to wait and provides equity holders with an incentive to speed up investment. As a result, in the absence of wealth expropriation by a levered firm’s debt holders, its shareholders exercise their investment option earlier than the shareholders of an otherwise identical all-equity firm. This result is at odds with the generally accepted intuition that in the absence of potential wealth transfers and taxes the shareholders of a levered firm would follow the same investment policy as that of an unlevered firm. In addition to providing various illustrations of the accelerated investment effect, we relate its magnitude to the presence of competition for investment opportunities.     

Real options,agency conflicts,and optimal capital structure

We examine the impact of a stockholder–bondholder conflict over the timing of the exercise of an investment option on firm value and corporate financial policy. We find that an equity-maximizing firm exercises the option too early relative to a value-maximizing strategy, and we show how this problem can be characterized as one of overinvestment in risky investment projects. Equityholders’ incentive to overinvest significantly decreases firm value and optimal leverage, and significantly increases the credit spread of risky debt. Numerical solutions illustrate how the agency cost of overinvestment and its effect on corporate financial policy vary with firm and project characteristics.     

Optimal subsidies and guarantees in public–private partnerships

In this paper, we analyse how certain subsidies and guarantees given to private firms in public–private partnerships should be optimally arranged to promote immediate investment in a real options framework. We show how an investment subsidy, a revenue subsidy, a minimum demand guarantee, and a rescue option could be optimally arranged to induce immediate investment, compensating for the value of the option to defer. These four types of incentives produce significantly different results when we compare the value of the project after the incentive structure is devised and also when we compare the timing of the resulting cash flows.     

Information disclosure and the feedback effect in capital markets

Are more informative credit ratings always preferred and how should regulators intervene to promote investment efficiency? To answer these questions, we develop a model in which a manager seeks financing for a project. The main frictions are that the manager is privately informed about the project’s quality and cannot commit not to divert resources away from it. This setting gives rise to a feedback effect in which creditors’ beliefs about whether the manager diverts resources can become self-fulfilling. A critical consequence of this feedback effect is that more precise ratings can be detrimental for investment efficiency. Intuitively, by revealing that a firm is of worse quality and increasing its cost of finance, more informative ratings strengthen the manager’s incentive to withdraw resources away from the project and default. We show that the regulation of credit rating agencies should be lenient during good times and strict during bad times.     

The effects of external financing costs on investment timing and sizing decisions

We develop a dynamic model in which a firm exercises an option to expand production on either a small or large scale with cash reserves and costly external funds. An intermediate level of cash reserves, which is insufficient for the large-scale investment but sufficient for the small-scale investment, provides an incentive for the firm to invest early in the small-scale project. These results fill the gap between two types of results: (i) empirical findings of a U-shaped relation between the investment volume and internal funds and (ii) empirical predictions of a U-shaped relation between the investment timing and internal funds. In addition, our results have real-world implications for investment in alternative projects.     

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.     

Real options with ex-post division of the surplus

This paper examines a real option model where two vertically related firms are involved in a specific investment project that is subject to an uncertain payoff. While ex-post bargaining between a seller and a buyer leads to underinvestment by the seller in a standard model where timing of the seller’s investment is exogenous, we show that this need not be the case when the seller’s timing of investment is endogenous. However, bargaining with a buyer leads to excessive waiting. More severe holdup and higher uncertainty will lead to vertical integration of activities to avoid timing inefficiencies.     

Leverage, volatility and executive stock options

This paper studies how an optimal wage contract can be implemented using stock options, and derives the properties of the optimal contract with stock options. Specifically, we show how the exercise price and the size of the option grant should change in response to changes in exogenous parameters. First, for a fixed exercise price of executive stock options, the size of the option grant decreases in the riskiness of a desired investment policy, decreases in the volatility of return from the risky project, and increases in leverage. Second, for a fixed size of the option grant, the optimal exercise price of managerial stock options increases in the riskiness of a desired investment policy, increases in the volatility of return from the risky project, and decreases in leverage. Several empirical predictions are drawn from these conclusions regarding the pay-performance sensitivity of management compensation.     

Risky Debt,Investment Incentives,and Reputation in a Sequential Equilibrium

The agency relationship of corporate insiders and bondholders is modeled as a dynamic game with asymmetric information. The incentive effect of risky debt on the investment policy of a levered firm is studied in this context. In a sequential equilibrium of the model, a concept of reputation arises endogenously resulting in a partial resolution of the classic agency problem of underinvestment. The incentive of the firm to underinvest is curtailed by anticipation of favorable rating of its bonds by the market. This anticipated pricing of debt is consistent with rational expectations pricing by a competitive bond market and is realized in equilibrium. Some empirical implications of the model for bond rating, debt covenants, and bond price response to investment announcements are explored.     

Overcoming Opportunism in Public‐Private Project Finance

The possibility of opportunistic behavior, whether by the private investors who operate public‐private projects or by the government agencies who oversee and administer them, can become a powerful deterrent to raising public‐private project financing, especially considering the scale of the investment in infrastructure. Nevertheless, both parties can protect themselves against the counterparty's possible opportunism by giving the investor an “exit” (or put) option and the public agent a “bail‐out” (or call) option on the private investor's shares. In describing the role and design of such puts and calls, this paper presents a mechanism for converting “natural monopolies” into competitive or contestable markets by using over‐the‐counter option contracts that combine the stability of long‐term contracts and the flexibility of short‐term contracts. In the language of economists, the exit/bail‐out option mechanisms presented here are seen as reducing barriers to entry by streamlining incomplete long‐term contracts and avoiding contractual problems related to “bounded rationality” and opportunism.     

为什么上市公司选择股权激励计划?

本文研究上市公司选择股权激励计划的原因。本文发现,中国上市公司选择股权激励方案有其特有的制度背景和公司动机。这些动机之间彼此具有相互作用,且公司治理的影响更为重要。与国外相类似,对人力资本的需求是上市公司选择股权激励的动机;不完善的治理结构、严重的代理问题也会使公司有动机选择股权激励,但是,部分上市公司选择股权激励的动机是出于福利的目的,股权激励没有作为代理成本的替代却成为代理成本的结果。同时,处于市场化程度越高的地区公司越有动机选择股权激励。本文的贡献在于基于中国的制度背景对公司为什么选择股权激励进行研究,并发现了公司选择股权激励的内在动机。     

Capital budgeting, information timing, and the value of abandonment options

This paper investigates how an abandonment option influences the optimal timing of information in a sequential adverse selection capital budgeting model. While the divisional manager has imperfect private pre-contract information, headquarters can time whether the manager obtains perfect project information before (timely information) or after (delayed information) the contract is signed. In the absence of the abandonment option, headquarters favors timely (delayed) information if the investment costs are high (low). The presence of the abandonment option favors delayed information because under the timely information regime the value of the abandonment option is zero, whereas under the delayed information regime the value of the option is positive.     

Presale Contract and its Embedded Default and Abandonment Options

The presale contract is a popular property selling method that allows a buyer to default on the remaining payment and/or a developer to abandon a project. Using a simple two-period game theoretical model, we derive a closed-form pricing equation for a presale contract that explicitly accounts for a developer??s abandonment option and a buyer??s default option. Although a developer has an abandonment option under either a spot sale or a presale method, the option is more valuable under a presale contract because of an additional cash inflow from the presale downpayment. A presale also provides a buyer a default option, which is valuable in a real estate market with uncertain demand and price risk. We analyze the implications of the abandonment option on a developer??s construction decision and choice of selling method, as well as the implications of the default option on a buyer??s purchase decision. Furthermore, our model framework has implications to the pricing of futures contracts that involve both stochastic revenues and costs.     

Option Value to Waiting Created by a Control Problem

We study a principal-agent model in which there is an option to defer a capital project approval decision. A control (incentive) problem makes the option to wait valuable when it would not have been valuable otherwise. Deferring the project approval decision has both a cost and a benefit. The cost of waiting is that the agent's uncertainty regarding future project cost realizations cannot be exploited. However, by delaying the first project's approval decision, the principal can condition its approval on the agent's cost report of the second project. Such conditioning can be valuable in the provision of incentives because of a diversification effect.     

The Cost of Capital and the Relevance of Non-diversifiable Risk

The conventional solutions to the corporate investment decision have been seriously challenged by recent developments in portfolio theory. In this paper, the author argues that, assuming the security market is composed of efficient diversifiers, there is no need, in the evaluation of investment projects, to adjust the time value of money to take account of risk. He concludes that the appropriate cut-off rate for any investment is equal to the yield on a 'risk-free' security such as undated or long-dated Government Stock.     

The agency problem,investment decision,and optimal financial structure

This article constructs a real options model in which a firm has a privileged right to exercise an irreversible investment project with a stochastic payoff. Supposing that the investment costs are fully sunk, a firm that exercises the investment option after debt is in place will then choose a better state to exercise this option as it issues more bonds. This debt-overhang phenomenon, however, benefits the firm since waiting is itself valuable. Accordingly, the firm will both exercise the investment option later and issue more bonds as compared with a firm that issues bonds upon exercising the investment option.     

我国企业高管股权激励与研发投资——基于内生性视角的研究

本文以2002—2009年我国上市公司为研究对象,探讨了股权分置改革前后我国企业管理层股权激励对研发投资的影响,并在此基础上检验了管理层股权激励的内生性。研究发现,高管股权激励存在内生性,在控制了内生性之后,股改前股权激励与研发投资之间存在倒U形曲线关系;股改后股权激励对研发投资具有显著的正向影响。本文结果表明应该将研发投资作为股权激励方案的激励条件之一;此外,合理的安排股东与管理层之间的股权配置比例是保证企业有效进行研发投资、提升企业自主创新能力的必要手段。本文的结论深化了我们对股权激励内生性的理解,并为我国企业更好地实施管理层股权激励和企业自主创新战略提供了理论支持和实证证据。     

耐用品、投资专有冲击与货币政策福利

本文构建蕴含耐用品与非耐用品的两部门DSGE模型,研究投资专有冲击对货币政策及社会福利的影响。投资专有技术进步改进了投资转化为生产资本的效率,放大边际成本波动,增加了厂商调价动机和价格水平变动。即使耐用品价格完全灵活,最优货币政策也无法同时稳定价格和实际GDP。研究发现:(1)耐用品相对价格缺口波动率的上升虽然增加了实际GDP波动,但能够有效地降低投资专有技术对边际成本的冲击,减少价格变动的福利损失。所以两部门投资专有冲击时,央行倾向于稳定价格水平。与其相反,在单部门投资专有冲击和两部门生产技术冲击时,最优货币政策应降低耐用品相对价格缺口波动,稳定实际GDP。(2)对比三种泰勒规则:钉住非耐用品PPI、钉住加权平均PPI及钉住CPI,福利分析发现钉住非耐用品PPI最优,钉住CPI次之,钉住加权平均PPI的福利损失最大。就损失程度而言,投资专有冲击的福利损失是生产技术冲击的2倍,表明投资专有冲击加剧了最优货币政策在稳定价格与实际GDP间的权衡。     

股权激励对企业非效率投资行为的影响研究——基于高管过度自信中介效应的视角

基于高管过度自信的视角考量我国上市公司股权激励实施对企业非效率投资行为的影响,结果表明,我国上市公司普遍存在过度投资和投资不足的现象,股权激励能有效抑制过度投资行为,但对企业投资不足现象具有显著的促进作用,同时,高管过度自信会导致企业过度投资行为的发生,相应地会降低投资不足行为的产生;高管过度自信是导致股权激励效果弱化的重要原因,股权激励的实施会在高管过度自信的作用下加剧企业过度投资行为,而对投资不足表现出不显著的抑制效果;良好的公司治理环境能有效抑制高管过度自信概率,也是激励效果得以发挥的重要前提。     

Real options with unknown-date events

The real options literature has provided new insights on how to manage irreversible capital investments whose payoffs are uncertain. Two of the most important predictions from such theory are: (i) greater risk delays a firm’s investment timing, and (ii) greater risk increases the option value of waiting. This paper challenges such conclusions in a setting in which the relevant random variable is the arrival time of an unfavorable event. In particular, we model situations in which a firm must choose the time at which to invest in a project whose profit grows at a known rate until a random date is reached and decays thereafter, which may be representative of stochastic product or industry life cycles. This is a novel framework in which a firm can update its beliefs about the profitability of an investment opportunity by simply waiting to invest. Thus, a wait-and-see approach allows the firm to capitalize on favorable market evolutions and avoid adverse ones to some extent. Our framework is simple and does not require using stochastic calculus, which allows for an economic interpretation of optimal investment policies for the cases of one-time and sequential investments.