Teaching Net Present Value Analysis: Returns-to-Assets versus Returns-to-Equity

We survey textbooks from agricultural economics and other subject matter areas to determine their treatments of the returns-to-assets versus returns-to-equity methods for determining the net present value of investment projects. Textbook authors disagree about the appropriate method, often give conflicting advice as to how a given method should be applied, and do not show how the results of the two methods can be reconciled. We provide a consolidated discussion of the circumstances under which the two methods produce the same net present value.     

Influence of strategies and heuristics on farmers' response to change under uncertainty

Hierarchical Decision Models of woolproducers' decisions provide unique insights into the impact of major price changes. Producers' lagged response in some contexts appear to be due to the ambiguous decision environment they face, their strategic goals and responses to that environment apart from lags caused by factors such as attitude to risk, expectations adjustment, adjustment costs and learning costs. Much of the response to major price changes comes from strategic decisions to change enterprises rather than marginal changes to existing enterprises. In ambiguous environments, methods may need to be found that incorporate simplifying behavioural rules and strategies.     

Disagreement and the Cost of Capital

We assess how forms of disagreement among investors affect a firm's cost of capital. Firms experience a lower cost of capital if investors perceive that other investors are ignoring relevant disclosures (perceived errors of omission), but a higher cost of capital if investors perceive that others are responding to irrelevant disclosures (perceived errors of commission). The impact of these two sources of disagreement on the cost of capital is determined by the distribution of opinion and the nature of disclosure. For example, even though aggregated disclosures reveal less to investors, aggregated disclosures may decrease the cost of capital by eliminating disagreement associated with perceived errors of commission. These and additional results arise because the cost of capital is driven not only by investors’ uncertainty about the firm's future earnings performance, but also by investors’ uncertainty about the evolution of beliefs, which partly determines the path of prices.     

When Does Information Asymmetry Affect the Cost of Capital?

This paper examines when information asymmetry among investors affects the cost of capital in excess of standard risk factors. When equity markets are perfectly competitive, information asymmetry has no separate effect on the cost of capital. When markets are imperfect, information asymmetry can have a separate effect on firms’ cost of capital. Consistent with our prediction, we find that information asymmetry has a positive relation with firms’ cost of capital in excess of standard risk factors when markets are imperfect and no relation when markets approximate perfect competition. Overall, our results show that the degree of market competition is an important conditioning variable to consider when examining the relation between information asymmetry and cost of capital.     

Flood Insurance Coverage in the Coastal Zone

We explore determinants of flood insurance demand in the coastal zone using micro‐data for nine Southeastern counties. Overall estimates indicate price inelastic demand, though subsidized policyholders have greater coverage and are more price sensitive. Mortgage borrowers exhibit no greater coverage; only 12 percent in 100‐year flood zone indicate flood insurance was required by their lender. Flood insurance demand is increasing in the levels of flood and erosion risk. We find a positive correlation between household income and coverage, but the effect is not monotonic. Community‐level erosion hazard mitigation projects influence flood insurance coverage, with beach replenishment acting as a complement.     

Asymmetric Information and Countermeasures in Early Twentieth‐Century American Short‐Term Disability Microinsurance

American workers and employers a century ago formed microinsurance funds to provide sick pay to temporarily disabled workers. This article analyzes a 1908 survey of several hundred such microinsurers. Theoretically, a single cross‐section may yield evidence of asymmetric information, but cannot enable the separation of moral hazard and adverse selection effects. However, microinsurance fund managers and outside observers believed they did see separate such effects and so microinsurers created separate countermeasures to mitigate these problems. This article finds prima facie evidence of asymmetric information and suggestive evidence of the separability of informational asymmetries and the effectiveness of such countermeasures.