Positive Net Present Value Investment Research Articles

A hazai gyermekvédelmi rendszer fejlesztésében rejlő potenciális gazdasági hasznok

The study approaches child protection involvement from an economic perspective, and is thus a niche study in the Hungarian literature. It seeks to quantify the social benefits to society of mitigating the negative impact of involvement in the provision of child protection, and the maximum return on investment in the child protection system for a given payback period and discount rate. As in international research, the evaluation of the project is based on a cost-benefit analysis of the increase in educational attainment. The social benefit is estimated by determining the number of people affected and the social benefit per person affected, and the social discount rate is determined using two types of elasticity estimates. The results suggest that a greater allocation of public resources to child protection provision not only benefits the individuals concerned, but can also result in a positive net present value investment for society as a whole.

Foreign bank branch participation and U.S. syndicated loan contract design

I examine whether and how foreign bank branch participation in U.S. loan syndicates influences loan contract design. I predict that foreign bank branches’ dollar funding liquidity risk and information frictions increase renegotiation costs and affect loan contract design. I find that loan contracts with greater foreign bank branch participation include fewer flexibility-reducing covenants, such as capital expenditure and balance sheet covenants, that restrict borrowers from making positive net present value investments. I document similar results using matched sample and plausibly exogenous variation in foreign bank branch participation. Additionally, loan contracts with greater foreign bank branch participation are more likely to feature split control rights, which give banks in revolving lines of credit the exclusive right to renegotiate. In contrast, foreign bank branches are more likely to be included in covenant-lite term loans. Overall, I show that foreign bank branch participation affects U.S. syndicated loan contract design through renegotiation costs.

PAID MATERNITY LEAVE AND FIRM VALUE

ABSTRACT Paid maternity leave is a voluntary corporate decision. Its Cost-Benefit Analysis is presented by Obonyo et al. (2021). “The benefit is to help retain competent employees, to increase corporate morale and to benefit employee and business operations. There is an obvious cost to employees taking off work with pay for delivering and caring for their newborns or newly adopted children. The question is whether investors consider the policy of paid maternity leave as a positive net present value investment for long-term shareholder wealth maximization or as an expense.” This study is the first research to examine the stock price reaction to the announcement that a firm will initiate paid maternity leave benefits. We use a list of companies collected by the Fairygodboss.com website (2019) with data for companies that offer paid maternity leave. Using an event study model, the Day 0 abnormal return is a highly statistically significant negative -.51%. In addition, all the CARs around the event date are statistically significantly negative. By contrast, regression results indicate that voluntary paid maternity leave programs that are longer in length have better results for firm value. Thus, the findings of this research indicate that longer the term of the paid maternity leave policy (more investment in employees), the more positively it impacts firm value. Keywords Maternity Leave; Event Study; Firm Value

Risk factors, uncertainty, and investment decision: evidence from mutual fund flows from India

Asset pricing theories provide an understanding of the risk factors that determine the price of assets. The identification of risk factors assists investors in seeking out profitable investment opportunities. The difficulty in observing how investors identify such opportunities and how they react to it has largely restricted the literature from determining the factors that matter to an investor. There is a paucity of empirical studies that give insight into the investment decision-making process of an investor. Some of the recent studies that seek to fill this gap have used mutual fund flows to infer which asset pricing model investors use. The fund flows are used as a measure of investors’ response for the identification of a positive net present value investment opportunity. These studies suggest that the Capital Asset Pricing Model (CAPM) is closest to the asset pricing model used by investors in the US market. Taking this literature forward, we enquire whether investors from Indian markets exhibit a similar pattern when making investment decisions. Using the fund flows to actively managed equity schemes, we have investigated the risk factors that matter for mutual fund investors in India for the period from April 2006 to December 2019. We use alternative performance measure and then evaluate the sensitivity of fund flows to each of the performance measures. Our results suggest that investors assess the performance of competing investment opportunities based on naïve measures. Further, though uncertainty has a negative impact on fund flow, the flow–performance relation is not sensitive to the level of uncertainty.

Does It Pay to Play? A Multi-Perspective on Follow-On Funding, Funding Structure and Investment Profitability in a Venture Capital Context

Within this paper, I propose a comprehensive modelling framework to evaluate venture capital (VC) investment decisions from an individual investors' portfolio perspective. The approach integrates the perspective of different shareholding parties and allocation of rights usually determined via shares in each one's portfolio. Using a basic model implementation of the modelling framework, I focus on the feasibility of follow-on funding of investment projects given underlying investment profitability. In particular, I evaluate the minimum levels of profitability of the investment, where funding is feasible. Based on the model, I propose alternative explanations on observed phenomena in VC such as underinvestment (non funding of positive net present value investments) and funding of negative net present value projects which are ultimately rooted in common practice of venture funding structure. In a first model extension, I also consider the effectiveness of pay-to-play rights on the minimum levels of profitability. Based on the model's result, I conclude that pay-to-play rights effectiveness is eventually limited by the investment approval of shareholders.

Informative fund size, managerial skill, and investor rationality

This paper considers the nature of returns to scale in active management following Pástor et al. (2015) who fail to establish diseconomies of scale at the fund level. Using an enhanced empirical strategy, we find a significant negative impact of fund size on performance. This empirical evidence indicates that fund alpha and fund size are not independent entities. Consequently, skill, rather than being measured by the fund alpha, should be measured by the value that a fund extracts from capital markets. We also show that there exist sophisticated investors who correctly exploit positive net present value investment opportunities.

Return and Liquidity Relationships on Market and Accounting Levels in Brazil

ABSTRACT This article discusses profitability-liquidity relationships on accounting and market levels for 872 shares of publicly-traded Brazilian companies, observed between 1994 and 2013. On the market level, the assumption is that share liquidity is able to reduce some of the risks incurred by investors, making them more willing to pay a higher price for liquid shares, which would lower expected market returns. On the accounting level, the basic hypothesis argues that a firm's holding more liquid assets is related to a conservative investment policy, possibly reducing accounting returns for shareholders. Under the assumption of financial constraint, however, more accounting liquidity would allow positive net present value investments to be carried out, increasing future accounting returns, which would positively affect market liquidity and share prices in an efficient market, resulting in a lower market risk/expected return premium. Under the assumption of no financial constraint, however, more accounting liquidity would only represent a carry cost, compromising future accounting returns, which would adversely affect market liquidity and share prices and result in a higher market risk/expected return premium. Among the hypotheses, the presence of a negative market liquidity premium was verified in Brazil, with shares that traded more exhibiting a higher expected market return. On the margins of the major theories on the subject, only two negative relationships between excess accounting liquidity and market liquidity and accounting return, supporting the carry cost assumption for financially unconstrained firms, were verified. In terms of this paper's contributions, there is the analysis, unprecedented in Brazil as far as is known, of the relationship between liquidity and return on market and accounting levels, considering the financial constraint hypothesis to which the firms are subject.

Does executive compensation reflect equity risk incentives and corporate tax avoidance? A Japanese perspective

This study examines corporate tax avoidance as a determinant of executive compensation on the basis of equity risk incentives. Previous research shows that equity risk incentives motivate managers to make more risky, but positive net present value—investment decisions. Through correlation analyses, this study demonstrates that the tax risk measures adopted in this study are negatively associated with both the adoption of stock options and tax aggressive measures. Through multivariate analyses, this study demonstrates that executive compensations are significantly associated with our measures of tax risk positions despite the inclusion of several control variables. Moreover, this study finds consistent evidence that executive equity risk incentives are significantly associated with aggressive tax positions, regardless of the estimation method and the strength of the corporate governance function, and across several tax risk measures.

Why Defer to Managers? A Strong-Form Efficiency Model

We compare the efficiency with which management discretion and shareholder choice regulate hostile tender offers. This is the first paper in a long running debate that rigorously compares these legal rules to analyze both the critical informational assumptions and the interplay of those assumptions with principles of financial market efficiency. A critical innovation of our model is its focus on an informed management's choice among alternative corporate policies under the protection of the business judgment rule, but where agency costs exist. We assume that corporate assets and reinvestment opportunities are efficiently priced by financial markets, but that markets never learn the value of foregone investments. In this case, shareholder choice may create an agency problem whereby managers forego positive net present value investments that increase the risk of a hostile bid. We are able to determine analytic conditions under which the expected cost of this agency problem exceeds that of the standard agency problem usually identified with management discretion.

Sources of net present value gains in the acquisitions of corporate real estate

PurposeAcquisitions of properties are carried out by corporate firms for development, investment and operational uses. Acquisitions of corporate real estate announced by listed non‐property companies are found to have positive stock price reactions. This paper seeks to identify the reasons why acquisitions of corporate real estate are a positive net present value (NPV) investment to the acquiring firms.Design/methodology/approachThis paper draws theoretical explanations from real estate and finance literature to identify the reasons for the acquisitions to be positive NPV investments to non‐property listed companies.FindingsThe sources of gains in property acquisitions are worth, marriage value and business synergy. These explanations provide the reasons why the announcement of property acquisitions by listed companies could lead to positive wealth gains in the capital market.Originality/valueThis paper offers the explanations behind the positive stock price reactions upon the announcements of corporate real estate acquisitions.

Predation, Stock Prices and Financial Structure

This paper provides a theory of predation based on the incentives of firms to affect the stock price of their rivals in order to make issuing equity capital more costly for them. Myers and Majluf (1984) demonstrate that a firm may forego a positive net present value investment when financing the project would require it to issue undervalued stock. In a similar setting where giving up the project benefits competitors, a firm's rivals may compete more aggressively in order to lower the firm's stock price. The analysis examines how the a firm's financial structure affects the extent to which it will be subject to predation when there is asymmetric information between firms and investors. This analysis should be contrasted with models of predation such as Bolton and Scharfstein (1990) which require the prey to be subject to agency conflicts.

Are Share Price Reactions To Rights Offerings Sensitive To Different Economic Conditions?

This study examines short‐term stock price reactions to announcements of equity rights offerings in Singapore between 1983 and 2003 and investigates whether economic factors lead to different price reactions. The results show that the cumulative abnormal returns (CARs) associated with rights issues differ significantly across economic conditions at the time of issuance. Rights issues typically result in significantly large positive CARs during periods of economic growth but small positive but insignificant CARs during economic downturns. The CARs vary positively with Tobin’s q‐ratios, which indicate the availability of positive net present value investment opportunities of the firms issuing the rights. Our major finding is that the price reaction of Singapore firms to equity rights offerings is sensitive to economic conditions at the time of the rights issues.

The Straight-Line Depreciation is Wanted, Dead or Alive

We propose a simple axiomatic system that any depreciation and amortization method - complying with the recent developments in the guidelines set by GAAP and IASB - must obey. The system is consistent with both the matching and the impairment principles. We show that none of the prevalent depreciation methods (e.g., straight-line) altogether ex ante conforms to these principles. We then examine the accredited proportional depreciation method and show that it both maintains the axiomatic system and constitutes an extension to the economic depreciation method for positive net present value investments. Moreover, following Moulin (1988), we show that, for a plausible family of depreciation methods, the proportional method is the unique method that complies with the axiomatic system. Finally, we propose two consistency requirements of a depreciation method - dynamic consistency and partition consistency - and show that, in contrast to the commonly used methods, the proportional depreciation method is the only one to always sustain both. Depreciation and amortization in this study apply to all types of assets (tangible and intangible); however, they are particularly significant for costly investments such as real estate, machinery, and costumer relationship.

Optimal wage contracts under asymmetric information and moral hazard when investment decisions are delegated

I derive an optimal wage contract when risky investment decisions are delegated by riskaverse owners/investors to risk-neutral agents. The owners/investors do not know the probability distribution over the returns of any investment made by an agent. They know only the mean and the variance, and the upper and lower bounds of the return realizations of the different positive net present value (NPV) investment opportunities that can be discovered by their agents. They observe only the returns realized at the end of the period. Moral hazard with respect to investments made by agents, who are protected by limited liability, is also possible: an agent can falsely claim to have invested in one type of positive NPV investment opportunity and invest in another, or the agent can falsely claim to have invested in a positive NPV investment and invest in a negative NPV investment. I show that an optimal wage contract is simple under such conditions of severe asymmetric information and moral hazard. (JEL G20, G31)

The value-relevance of R&D and advertising expenditures: Evidence from Korea

This study examines the value-relevance of R&D and advertising expenditures of Korean firms, using a regression model based on the Ohlson [Contemp. Account. Res. (1995) 661] equity-valuation framework. Results indicate that R&D expenditures are positively associated with stock price, suggesting that capitalizing R&D expenditures is appropriate. The association is stronger for the portion of R&D expenditures that is capitalized, rather than expensed, suggesting that investors agree with management that the capitalized expenditures represent greater future economic benefits. Investors also appear to interpret fully expensed R&D expenditures as positive net present-value investments, however, suggesting that these expenditure should also be capitalized. Additional results indicate that advertising expenditures are negatively associated with stock price, and the magnitude of this negative association is similar to the association between other expenses and stock price. These findings suggest that investors believe the economic benefits of advertising expenditures expire in the current period, similar to other expenses.

Consequences of Bank Distress During the Great Depression

The consequences of bank distress for the economy during the Depression remain an area of unresolved controversy. Since John M. Keynes (1931) and Irving Fisher (1933), macroeconomists have argued that bank distress magnified the extent of the economic decline during the Depression. As the intermediaries controlling money and credit, banks were in a special position to transmit their distress to other sectors. But the mechanism through which banking distress mattered for the economy has been hotly contested. Milton Friedman and Anna J. Schwartz (1963) saw the contraction in the money multiplier—driven, in their view, by panicked depositors’ withdrawals of deposits—as the primary mechanism through which banking distress affected the real economy. They described the mechanism transmitting banking distress to the real sector as operating at the national level through changes in the aggregate supply of money and interest rates. Bank distress reduced the money supply available to the public either through the closure of banks and the consequent freezing of bank deposits, or the withdrawals of deposits by depositors that feared bank failure. Ben S. Bernanke (1983), building on Fisher (1933), emphasized the transmission of monetary shocks via their effects on the balance sheets of borrowers and on the supply of credit by banks. Borrowers’ balance sheets were worsened by debt deflation as the result of fixed dollar debt obligations—borrowers’ net worth and cash flow declined with the rising value of debt service costs relative to income. Borrowers with positive net present value projects, but weak balance sheets, had less internally generated retained earnings to invest and could not qualify for credit. Furthermore, Bernanke argued that the contraction of the money supply produced contraction of nominal income and prices relative to fixed debt service, which weakened borrowers’ balance sheets, and in turn, weakened banks. Not only did firms’ financial distress reduce the number of qualified borrowers, the contraction in banks’ net worth forced a reduction in the supply of bank loans to qualified borrowers. Many firms and individuals relied on banks for credit, and as those banks suffered losses of capital (due to asset value declines) and contractions in deposits (as depositors reacted to bank weakness by withdrawing their funds), even borrowers with viable projects and strong balance sheets experienced a decrease in the effective supply of loanable funds. Bernanke termed the combined weakening of borrowers’ balance sheets and the contraction in bank credit supply a rise in the “cost of credit intermediation.” The scarcity of perfect substitutes for the positive net present value investments of firms with weak balance sheets, and for the credit supplied by existing banks, implies that the weakening of firms’ and banks’ balance sheets, the disappearance of banks, and the contraction in surviving banks’ lending made it more difficult for the economy to channel funds to their best use. Thus, what began as a contraction in aggregate demand became a contraction in aggregate supply, which magnified adverse economic shocks and prolonged and deepened the Depression. The financial distress of firms and banks, and the decline in bank lending, were not only symptoms of the Depression, but means for magnifying the shocks that caused the Depression. Bernanke’s statistical evidence in support of this story is derived from time-series analysis at the national level, in * Calomiris: Graduate School of Business, 601 Uris Hall, Columbia University, 3022 Broadway, New York, NY 10027, and National Bureau of Economic Research (e-mail: cc374@columbia.edu); Mason: Department of Finance, Drexel University, 3141 Chestnut Street, Philadelphia, PA 19104 (e-mail: joe.mason@drexel.edu). We thank Valerie Ramey, David Wheelock, Charles Himmelberg, Steve Zeldes, Gary Gorton, two referees, and seminar participants at Columbia University, Wharton, Northwestern University and the 2001 Economic History Association Meetings for helpful comments on an earlier draft. We gratefully acknowledge support from the National Science Foundation, the University of Illinois, and the Federal Reserve Bank of St. Louis.

The Relation between Market Values, Earnings Forecasts, and Reported Earnings*

AbstractRecently, much of the research into the relation between market values and accounting numbers has used, or at least made reference to, the residual income model (RIM). Two basic types of empirical research have developed. The “historical” type explores the relation between market values and reported accounting numbers, often using the linear dynamics in Ohlson 1995 and Feltham and Ohlson 1995 and 1996. The “forecast” type explores the relation between market value and the present value of the book value of equity, a truncated sequence of residual income forecasts, and an estimate of the terminal value at the truncation date. The analysis in this paper integrates these two approaches. We expand the Feltham and Ohlson 1996 model by including one‐ and two‐period‐ahead residual income forecasts to infer “other” information regarding future revenues from past investments and future growth opportunities. This approach results in a model in which the difference between market value and book value of equity is a function of current residual income, one‐ and two‐period‐ahead residual income, current capital investment, and start‐of‐period operating assets. The existence of both persistence in revenues from current and prior investments and growth in future positive net present value investment opportunities leads us to hypothesize a negative coefficient on the one‐period‐ahead residual income forecast and a positive coefficient on the two‐period‐ahead residual income forecast. Our empirical results strongly support our hypotheses with respect to the forecast coefficients.

The Relation between Market Values, Earnings Forecasts, and Reported Earnings

Recently, much of the research into the relation between market values and accounting numbers has used, or at least made reference to, the residual income model (RIM). Two basic types of empirical research have developed. The “historical” type explores the relation between market values and reported accounting numbers, often using the linear dynamics in Ohlson 1995 and Feltham and Ohlson 1995 and 1996. The “forecast” type explores the relation between market value and the present value of the book value of equity, a truncated sequence of residual income forecasts, and an estimate of the terminal value at the truncation date. The analysis in this paper integrates these two approaches. We expand the Feltham and Ohlson 1996 model by including one- and two-period-ahead residual income forecasts to infer “other” information regarding future revenues from past investments and future growth opportunities. This approach results in a model in which the difference between market value and book value of equity is a function of current residual income, one- and two-period-ahead residual income, current capital investment, and start-of-period operating assets. The existence of both persistence in revenues from current and prior investments and growth in future positive net present value investment opportunities leads us to hypothesize a negative coefficient on the one-period-ahead residual income forecast and a positive coefficient on the two-period-ahead residual income forecast. Our empirical results strongly support our hypotheses with respect to the forecast coefficients.

The Effect of Corporate Acquisitions on Stockholder Returns in the Lodging Industry

ABSTRACT We examine the stock market's reaction to merger announcements in the lodging industry over the 1982–2000 period. Unlike the results for the overall market, we find that both the stockholders of the acquiring and target firms gain at the time of the merger announcement. In the lodging industry, mergers are positive net present value investments for bidders, whereas for the overall market, merger bids are at the best zero net present value investments. In addition, we found that shareholders benefit from mergers in the short- (one year), medium- (three year), and long-term (five year). Lastly, the wealth gains to tender offers are significantly greater than the wealth gains to mergers for both the portfolio of target and acquiring firms.

The implications of firms' investment opportunities for the valuation of cash flows from investing activities

Abstract This paper examines the market valuation of cash flows from investing (CFI) activities in the presence of investment opportunities. The market valuation of investing cash flows is hypothesized to be larger when a firm possesses a relatively larger amount of positive net present value investment opportunities. Using a dichotomous growth classification based on Tobin's q, the investing cash flows of high-growth firms are found to have significant explanatory power for unexpected security returns while the investing cash flows of low-growth firms are valued consistent with “over-investments” by firms' managers. Additional tests employing deciles of the growth classification suggest that the level of investment opportunities affects the return-CFI relation.