Extended Dividend,Cash Flow,and Residual Income Valuation Models: Accounting for Deviations from Ideal Conditions*

Previous empirical studies derive the standard equity valuation models (i.e., DDM, RIM, and DCF model) while assuming that ideal conditions, such as infinite payoffs and clean surplus accounting, exist. Because these conditions are rarely met, we extend the standard models by following the fundamental principle of financial statement articulation. We then empirically test the extended models by employing two sets of forecasts: (1) the analyst forecasts provided by Value Line, and (2) the forecasts generated by cross‐sectional regression models. The main result is that our extended models yield considerably smaller valuation errors. Moreover, by constructing these models, we obtain identical value estimates across the extended models. By reestablishing empirical equivalence under nonideal conditions, our approach provides a benchmark that enables us to quantify the errors caused by individual deviations from ideal conditions and thus to analyze the robustness of the standard models. Finally, by providing a level playing field for the different valuation models, our findings have implications for other empirical approaches, for example, estimating the implied cost of capital.     

When do venture capitalists collaborate? Evidence on the driving forces of venture capital syndication

Using a sample of 2,373 unique capital contributions from 437 venture capitalists (VCs) over subsequent rounds into 961 start-ups during the period 1995–2005 in Germany we disentangle the circumstances under which lead VCs engage in syndicate relationships with partner VCs. The results indicate that syndication is more pronounced when VCs face higher risks that need to be diversified and capital burdens are larger. Moreover, we document that industry investment experience lends legitimacy to lead VCs, allowing them to enter syndicate relationships to enhance their network positions. In general, greater industry experience is associated with more syndication. Lastly, the results show that lead VCs involve new/additional partners in subsequent financing rounds to leverage their idiosyncratic skills and knowledge to improve deal selection and/or provide a better quality of managerial advice.     

Foreign exchange,fractional cointegration and the implied–realized volatility relation

Almost all relevant literature has characterized implied volatility as a biased predictor of realized volatility. In this paper we provide new time series techniques to investigate the validity of this finding in several foreign exchange options markets, including the Euro market. First, we develop a new fractional cointegration test that is shown to be robust to both stationary and non-stationary regions. Second, we employ both intra-day and daily data to measure realized volatility in order to assess the relevance of data frequency in resolving the bias. Third, we use data on implied volatility traded on the market. In contrast to previous studies, we show that the frequency of data used for measuring realized volatility within a fractionally cointegrating framework is important for the results of unbiasedness tests. Significantly, for many popular exchange rates, the use of intra-day rather than daily data affects the emergence of a different bias, as the possibility of a fractionally integrated risk premium admits itself!     

Vergleich von Allokationsmethoden zur Kapazitätsvergabe bei grenzüberschreitenden Netzengpässen

Several market initiatives within Europe aim at implementing flow-based methods for capacity allocation. Compared to the common transaction-based methods, these new methods are supposed to lead to an improved utilisation of cross-border capacities. In order to quantify the implications, a model for the coupled consideration of the power plant dispatch and the resulting load flows in the transmission system was developed. By means of detailed data of the Central Western European region the model was used to highlight the advantages of a flow-based allocation. Due to the more accurate mapping of the actual flows within the algorithm, the trade volume can be increased significantly leading to an enhanced convergence of the single market prices. However, the involved market players do not benefit in the same way from the trading possibilities in the presented case. The algorithm does not send direct economic signals regarding the profitability of different locations of power plants because of the required simplifications in the practical implementation. But the system-wide impact of the input in a certain location can be evaluated and therefore also be controlled where appropriate.     

Efficient Grid Extension for Strongly Fluctuating Energy Sources

The statistical distribution function of the yield of a source of strongly varying output is usually presented as a ‘power-duration-curve’. We show that the decisive economic curve representing the marginal benefit of such fluctuating sources like wind energy can be derived directly from this distribution function. This may allow to determine the optimum investment in renewable energy systems. As one application we determine the economic optimum limit power of high voltage lines devoted to long distance transmission of wind energy as the intersection of the marginal-benefit-curve of the energy produced and the marginal-cost-curve of the transmission line.     

How cost-effective are result-oriented agri-environmental measures?—An empirical analysis in Germany

Agri-environmental measures (AEM) are the central area-based measures of the second pillar of the Common European Agricultural Policy. Cost-effectiveness of AEMs has to be improved. In this paper a newly designed AEM called result-oriented incentive is empirically analysed for the first time concerning its impacts on environmental effects and cost.     

Fixed capital and internal rate of return

For a neo-Austrian process of production, more generally multisectoral fixed capital models, it is shown that the maximum rate of growth and the minimum rate of interest are both equal to the internal rate of return. This von Neumann type equality is here obtained in absence of truncation, i.e., free disposal of fixed capital. If several internal rates of return coexist, the economically significant one is the maximal one. This result provides theoretical grounds for the internal rate of return criterion in infinite horizon.