Firm value,managerial confidence,and investments: The case of China

The purpose of this article is to test empirically the impact of Chinese managerial confidence on firm value through investment decisions. We use a simultaneous equation model, which treats firm value, investments, and managerial confidence as endogenous to the firm. With a sample of 329 Chinese listed firms and a confidence measure based on management shareholding, the 3SLS regression results show significant interactions among the three variables. Firm value has a positive impact on managerial confidence while the latter's impact on the former turns from positive to negative at a certain point. The results suggest a non‐monotonic relationship between managerial self‐confidence and firm value and imply an optimal level of managerial confidence. Therefore, while the leader selection process encourages confident talents to become decision‐makers, proper measures are required to prevent the confidence transformed into overconfidence.     

Developing Theories of Strategy Using Dominance Criteria

This article identifies key features of the strategy concept as a basis for reviewing existing theories of strategy. It also provides an agenda for future research. the article argues that there is a decision hierarchy in a firm, and defines strategy as the highest-level decision in the hierarchy. Consequently, strategy has to exhibit what may be called three features of dominance: vertical dominance, horizontal dominance, and dynamic dominance. A vertically dominant strategy is one that determines, directly or indirectly, other decisions of a firm. A horizontally dominant strategy seeks to optimize the value of the firm according to some criteria. Dynamic dominance implies that strategy should affect the subsequent decisions of a firm over a relevant period of time. With few exceptions, existing theories of strategy are issue-oriented and focus largely on horizontal dominance. More research should, therefore, be directed towards vertical and dynamic dominance criteria. If a comprehensive theory of strategy which satisfies the three dominance features cannot be developed, it is suggested that development should be directed towards integrating behavioural and economic approaches.     

Advice-seeking and advice-utilization for hiring decisions: An investigation of a partially outsourced recruitment process for rank-and-file managers

We study a large-scale, partially outsourced recruitment process. A specialized consultancy assesses applicants' soft-skills on behalf of a client firm, who retains agency over the hiring decision. We conceptualize this collaboration as an advice-seeking, advice-utilization process and analyze the effectiveness of hiring recommendations provided in influencing the client's hiring decisions. Two external HR specialists not only differ in their soft skill ratings, but also differ in their aggregation of these ratings into their hiring recommendations. The consultants' recommendations are particularly helpful in separating very suitable from clearly unsuitable candidates but are less effective in the mid-tier of the skill distribution.     

Economies of extremes: Lessons from venture-capital decision making

An organization's ability to exploit extreme events—such as exceptional opportunities—depends on its capacity strategy. The venture capital industry illustrates the interplay of expensive capacity and negative externalities from high utilization. The cost of adding a venture capitalist provides a strong incentive to run lean, but such leanness may make it impossible to evaluate all interesting investment opportunities. Using concepts from extreme-value theory, we analyze the trade-off between the costs and benefits arising from an increase in the number of evaluated deals. We ground our analysis in 11 years of archival data from a venture capital firm, representing 3631 deals, the decisions made, the reasons for those decisions, and the decision lead times. The firm identified 20% of arriving deals as worth evaluating during the screening process, but was not able to evaluate approximately 9% of those interesting deals due to a lack of capacity. We show that the value of increasing the number of deals evaluated increases with the tail weight of the distribution of deal values. When the right tail is light, increasing the number of deals evaluated may provide too modest a benefit to justify the cost. When, however, the right tail is heavy, the value of increasing the number of deals is likely to more than compensate for the cost of capacity. Our results provide new insight into the relative value of a chase capacity strategy that emphasizes responsiveness versus a high-utilization heuristic that emphasizes productivity. Our approach can be applied to other search operations such as personnel selection, quality circles seeking to identify root causes, and making employee capacity available for innovation.     

The financial investment decision of non-financial firms in China

This paper constructs a portfolio model to analyze the determinants of the financial investment decision of non-financial firms in China. Unlike the literature assuming that financial investments are riskless, our model allows risks in both fixed and financial investments. We show that this extension provides an analytically similar but economically different model from the literature. In particular, it is relative risk and risk-adjusted return gap, not pure risk and simple return gap that enter into firms’ financial investment decision model. Using firm-level panel data of 1902 firms listed in Chinese stock market over the period from 2006 to 2016 with semi-annual frequency, we find that the ratio of fixed investment risk over total risk dominates financial investment decisions of non-financial firms. However, rates of risk-adjusted return gap between financial and fixed investments play no role in Chinese firms’ financial investment decisions, which is in stark contrast to the results using a model assuming riskless financial investments. The baseline findings are robust to alternative measures of financialization and investment risk and different firm sizes, ownership structures and time periods.     

An impulse-control method for investment decisions in dynamic technology

This paper presents a new framework to augment standard methods in evaluating profitability of investments, especially those involved in dynamic technology. In this case there is a possibility that although a certain investment is profitable using standard methods, it should not be undertaken because it precludes a more profitable investment later on, when more advanced equipment will be available. The investment decision faced by a firm is presented here as an impulse-control problem, where the process of technological progress is modelled explicitly. The outcome of the optimization yields, in addition to investment expenditures, the expected time period between consecutive investments. A simple example demonstrates the use of the technique in actual investment decisions.     

关于折现率的一些思考

在进行投资决策时，投资人需要以投资项目的价值作为投资决策的依据。计算投资项目价值中的一个难点是如何选取合适睁折现率。文章对折现的意义、折现率的选择中要考虑的因素，以及折现率和投资风险的关系进行了探讨。     

The Structure and Management of Alliances: Syndication in the Venture Capital Industry*

abstract Syndicates are a form of inter‐firm alliance in which two or more venture capital firms co‐invest in an investee firm and share a joint pay‐off. Syndication is a significant part of the venture capital market yet little research has been conducted into the process of structuring syndicate deals and the management of syndicates following deal completion. This paper analyses the neglected issues concerning the structuring and management of syndicated venture capital investments from the perspectives of both lead and non‐lead syndicate members using two surveys of venture capital firms and examination of syndication documents. Lead investors typically have larger equity stakes and the syndicated investment agreement is a document that enshrines the rights of participants rather than specifying behaviour. Contractual arrangements typically serve as a back drop to relationships as non‐legal sanctions are important and decisions are typically reached following discussion and consensus, but lead venture capital investors’ residual and specific powers are important in ensuring timely decision‐making. The findings extend previous work on alliances by emphasizing the importance of non‐legal sanctions, especially reputation effects, in mitigating opportunistic behaviour by dominant equity holders. The paper also adds to the limited research on the dynamics of alliances by highlighting the role of repeat syndicates.     

Breadth-of-impact frontier: How firm-level decisions and selection environment dynamics generate boundary-spanning inventions

In this paper, we provide an ex-ante explanation for why some technologies such as James Watt’s steam engine move successfully across broad technological fields, while other technologies do not. Using a sample of VC-backed biotechnology firms, we examine firm knowledge exploration choices along three dimensions—the decision to build from technologies across broad fields, the decision to explore application domains that are new to the firm, and the decision to mix these two options at the same time. We argue that firm-level invention decisions find differing responses when received by the selection environment. We find evidence of a “breadth-of-impact frontier” for technologies, wherein the choice of whether a firm should enter into a new application domain than those of the past should be informed by the degree to which the technology is citing prior work narrowly or broadly. The findings suggest that the belief that broad sourcing diversity will always result in greater citation diversity requires some caveats. The results contribute to the understanding of not only how entrepreneurial firms evolve but also how individual firms contribute to collective progress.     

Economic theory and exchange rate forecasts

Businesses use forecasts of exchange rates to make decisions about production, employment, investment, financial management, and pricing decisions. The proper statistical criteria for making and evaluating these exchange rate forecasts are implied by the underlying decision problem. That decision problem is in turn affected by the economic environment facing the firm and its industry, the overall macroeconomic situation, and the main types of disturbances affecting exchange rates. In general, the proper loss function for the forecasting problem will be asymmetric.     

To invest or not to invest: strategic decision making toward investing in training and development in Korean manufacturing firms

This study draws on the literature on strategic choice theory and training and development (T&D) to explore the theoretical mechanisms that explain the strategic decisions of top management, thereby leading to the T&D investment of firms. The current theoretical framework was examined using cross-lagged data collected from 163 Korean manufacturing companies at three time points over a five-year period. Results confirmed that firm performance and environmental change exert significant effects on top management strategic orientation toward T&D, which in turn, lead to financial resource allocation to T&D. The analysis also demonstrated that the effect of top management strategic orientation toward T&D on actual financial investment in T&D is stronger when the current level of human capital is high but not when it is low. This study provides meaningful practical and theoretical insights into the firm-level strategic decisions on T&D investment in organizations.     

Strategic real options under asymmetric information

This paper studies the effect of private information on the capital allocation decisions of firms who operate under imperfect competition. I analyze two interactive firms, one with private information and the other without, who must decide when to undertake an irreversible and uncertain investment decision. Traditional non-strategic models of irreversible investment under uncertainty involve a single decision maker and result in an optimal period of delay before the investment is undertaken. In a strategic setting, firms must balance their desire to delay against competitive advantages from early investment. I find that an equilibrium may not exist within the standard continuous framework when the private information is over revenues. Moreover, when an equilibrium does exist the competitive pressures from the uninformed firm are weak. This is in contrast to existing models with asymmetric information over costs, where an equilibrium always exists and the competitive pressures remain strong (Hsu and Lambrecht, 2007). This work shows that the investment timing decision, and thus the value of the private information, is highly sensitive to the nature of incomplete information.     

建设工程项目投资决策阶段的造价控制

建设工程造价控制工作贯穿项目建设的全过程。在建设工程项目决策阶段所作的各项技术经济的决策对项目的工程造价有重大影响,特别是建设标准水平的确定、建设地点的选择、工艺的选择、设备选用等,都直接关系到工程造价的高低。项目投资决策阶段的造价控制是决定工程造价的基础,它直接影响着各个建设阶段工程造价的控制是否科学合理。     

Integrated environmental policy instruments driven river water pollution management decision system

Market-based approaches and command and control regulations are the two main tools that policy/decision makers use to implement environmental protection goals; however, these alone have proven to be somewhat ineffective or counterproductive in some cases. Therefore, this study proposes a hybrid environmental policy tool to guide river basin environmental management decisions. The river basin authority and regional Environmental Protection Agency (EPA), as the two leading decision makers, and policy makers and implementers of river basin management, make decisions sequentially in a process similar to a Stackelberg game. This decision making can be mathematically represented using a bi-level optimization model. The proposed model addressed the conflicting equitable resource allocation and economic efficiency objectives to achieve coordinated development of the whole river basin. To verify the model effectiveness, the most considerable pollutant emissions limits and water quality standards were set, and incentive measures (pollution chargers and subsidies) were applied to assess these hybrid instruments' impact on the decision outcomes. The results from a Minjiang river basin case further illustrated that the trade-off between social equity and cost-efficient environmental goals could efficiently achieve, proving that a combination of instruments could be influential in pollution decision-making and delivery of environmental policy. Given the model's proven effectiveness, several proposals are given for solving complex pollution problems that also need to consider the related socioeconomic issues.     

An Empirical Test of Cognitive Style and Strategic Decision Outcomes*

abstract We examine how cognitive style, as measured by the MBTI, affects strategic decision outcomes. Executives participated in a simulated strategic decision making environment that allowed controlled collection of decision outcomes, including manager decisiveness, decision quality, and perceived effectiveness. We found that iNtuiting/Thinking managers used their intuition to make cognitive leaps based on objective information to craft more decisions of higher quality than other managers. In contrast, Sensing/Feeling types used time to seek socially acceptable decisions, which led to the lowest number of decisions and the lowest perceived effectiveness of all. We found no effect on decisiveness or perceived effectiveness based on a manager's preference for Perceiving or Judging. However, we found that others perceived Extraverted managers as being more effective than Introverted managers when, in fact, the Extraverts were no more decisive than Introverts. Thus, cognitive style influences actual decision outcomes as well as how others perceive one's decision performance.     

The choice between greenfield investment and cross-border acquisition: A real option approach

The purpose of this study is to formalize the choice of market entry strategy for an individual multinational enterprise (MNE) from a dynamic perspective. It is argued that incorporating a suitable treatment of irreversibility, uncertainty and flexibility related to a MNEs investment decision gives further insights to the choice of cross-border acquisitions to greenfield investment as the preferred entry mode. In most cases, the initial entry strategy serves as a platform allowing the firm to make subsequent investments to exploit host-country advantages and capabilities. We allow for this by taking a two-step expansion strategy explicitly into account. The evolutionary process of the value of the foreign direct investment includes two stochastic elements as well as the timing that triggers the transition from export to foreign direct investment. The results suggest that uncertainty and future investment opportunities play an important role when it comes to transit from export to the first phase of the foreign direct investment commitment as well as have an impact on the choice of entry strategy.     

Entry,financing, and bankruptcy decisions: The limited liability effect

A firm, which has a privileged right to undertake an irreversible investment project, simultaneously determines whether to exercise this project and also how many bonds to issue in the presence of demand uncertainty. The firm will not exercise the project until its net value from investing immediately equals its option value from delaying investment. The firm’s choice of debt levels balances the tax advantage of debt against a cost associated with the event of bankruptcy. The effects of uncertainty, asset specificity, and the costs to purchase capital later on a firm’s entry, financing, and bankruptcy decisions are examined and compared with those in the literature.     

The peer-firm effect on firm’s investment decisions

This study investigates the effect of peer firms on firm investment strategies. We test the peer group effect hypothesis along differing levels of financially constrained firms as well as differing degrees of industry competition. Using idiosyncratic equity returns as the instrument variable, we use 2-stage least squares regression to identify the influence of peer firms’ investment decisions on a firm’s own investment policies. Our analyses empirically confirm that there is a peer group effect in making firm investment decisions. More financially constrained firms show greater dependency on peers’ investment decisions. Tests of peer sensitivity to the increase in industrial competition, however, displayed a U-shaped quadratic curve, which shows that firms have the lowest peer group effect in medium-competition markets. We claim that imitative behavior in investment is presumably weak in the mid-competition market because firms are yet to be distinguished in this market.     

Risk externalities and the problem of wildfire risk

Homeowners living in the wildland–urban interface must decide whether or not to create a defensible space around their house in order to mitigate the risk of a wildfire destroying their home. Risk externalities complicate this decision; the risk that one homeowner faces depends on the risk mitigation decisions of neighboring homeowners. This paper models the problem as a game played between neighbors in a wildland–urban interface. The model explains why sub-optimal investment in defensible space is likely and provides insights into the likely effectiveness of programs designed to encourage households to increase their defensible space. Data from Boulder County, Colorado confirm that a household's defensible space decision depends on the defensible space outcomes at neighboring sites.     

Investment timing decisions under threat of potential competition: Why firm size matters

We study the value of the option to wait when other firms are looking at similar opportunities and may enter while one firm is waiting for uncertainty resolution. There are two important results. First the value of an investment project is affected by a firm’s assets-in-place, giving some firms a comparative advantage in competitive situations. Second, when two firms with different sized assets-in-place are looking at similar investment decisions, in the unique sub-game perfect equilibrium, the smaller firm invests earlier and also exits before a competing firm with larger assets-in-place. This makes an otherwise identical investment more valuable for the smaller firm. The larger firm optimally foregoes first-mover advantage because of higher expected exit costs.