Risky Projects Research Articles

Construction Project Scheduling Taking into Account the Risk of Temperatures Below –10°C in Poland

The article attempts to determine the value of the duration of the building process depending on the risk of the occurrence of temperatures below –10°C in Poland. It summarizes the results of measurements of the temperature study over 62 years (from 1950 to 2011) in Poland. The number of days with temperatures below –10°C in future years was forecasted. The method of ARIMA (Autoregressive Integrated Process Average) STATISTICA STAT SOFT was used. Stationarity series was tested using an IDW Durbin Watson integrative statistics and homoscedasticity was tested by the Levene test. The forecast error was verified using autocorrelation and partial autocorrelation residues functions. On the basis of calculations, the risk values for outdoor works in each month in Poland was established. It is a part of BIM 6-D calculation. The calculated risk value can be used for the calculation in Risky Project Professional and in other programs. The proposed risk values and the method of calculation are the upcoming modification product, which has not been reported yet.

Real Option Signaling Games of Debt Financing Using Equity Guarantee Swaps under Asymmetric Information

We analyze the real option signaling game models of debt financing of a risky project under information asymmetry, where the firm quality is only known to the firm management but not outsiders. The firm decides on the optimal investment timing of the risky project that requires upfront fixed funding cost and subsequent operating costs. The fixed funding cost is financed via either direct bank loan or entering into a three-party equity guarantee swap (EGS) that involves a bank granting the loan and third party guarantor. Under the EGS agreement, the guarantor is obligated to pay all the future coupon stream to the bank upon default of the firm. In return for the provision of the guarantee, the guarantor obtains certain proportional share of equity of the firm at the time when the swap agreement is signed. The share of equity demanded by the guarantor depends on the outside investors' belief on the firm quality. The low-type firm has the incentive to mimic the investment strategy of being high-type in terms of investment timing and share of equity. The high-type firm may adopt the appropriate separating strategy by speeding up investment or choosing an alternative financing choice. The resulting loss of the real option value of the investment opportunity represents the information cost under separating strategies. We examine the incentive compatibility constraints faced by the firm under different quality types and discuss characterization of the separating and pooling equilibriums. Unlike the usual assumption of perpetuity of investment opportunity, our real option model assumes the time window of the investment opportunity to be finite. We explore how the information cost and nature of separating and pooling equilibriums evolves over the finite time span of the investment opportunity. The information costs and investment thresholds exhibit interesting time dependent behaviors. We examine the firm's investment and financing choice between EGS and the direct bank loan against time and other parameters via comparison of the corresponding information costs and investment thresholds.

Ranking Distributions When Only Means and Variances Are Known

Consider a choice between two random variables, for which only means and variances are known. Is it possible to rank them by putting some constraints on risk preferences? We provide such a ranking by bounding how much marginal utility can change. Such bounds enable us to rank all distributions with given means and variances by first-order almost stochastic dominance. We show how our results can be used to compare a risky project and a sure payoff and also provide a new connection between the Sharpe and Omega ratios from finance.

Tax avoidance in management-owned firms: evidence from Brazil

PurposeThe purpose of this paper is to test if companies with a greater concentration of management ownership (and thus more risk-averse managers) avoid less tax.Design/methodology/approachThe authors use a regression analysis with panel data, using as a sample of Brazilian companies from 2001 to 2015. The authors investigate the impact of insider ownership on tax avoidance, testing how and how much different ownership levels of inside owner are associated with tax avoidance measured by effective tax rates and book-tax differences.FindingsThe results indicate that different levels of management ownership are associated with different levels of tax avoidance behavior.Originality/valueThis paper contributes to the literature showing that ownership and decision making are not always focused on only a few decision makers. The owners are likely to be more risk averse and therefore less willing to invest in risky projects such as tax avoidance.

Debt-Equity Conflict and the Incidence of Secured Credit

Classic finance theory observes that while debt can mitigate the conflict between equity and management, its issuance creates a conflict between debt and equity. We search for evidence of this conflict in the incidence of secured debt, which can be used by financially distressed firms to finance unduly risky projects for the benefit of equity at the expense of unsecured creditors. Skeptics of the debt-equity conflict’s practical importance believe that distressed-firm management avoids secured credit, which may compel equity to relinquish control of a firm. Consistent with the classic account, our controlled study shows a significant run-up of secured credit, as a proportion of assets and of liabilities, prior to bankruptcy filings of publicly traded firms. Together with recent evidence of inefficiency as firms approach bankruptcy, our results support proposals for the subordination of secured debt to nonconsensual claims and for enhanced enforcement of covenants against the issuance of secured credit.

Strategic R&D projects choice of the firm: theory and evidence from Korea

ABSTRACT This paper analyses the impact of the financial costs of using innovation projects supported by government grants on firm's innovation project choice through a theoretical model. Then, theoretical predictions are verified by using unique data. In particular, we utilise the quasi-experimental environment brought about by the institutional characteristics of Korea's R&D grant programme and estimate the effect of the cost difference faced by the firm on the type of innovation outcomes (product or process innovation) through the regression discontinuity design. We theoretically confirm that a firm that has to pay a high price to utilise an innovation project chooses a risky project compared to a low-cost firm. The results of empirical analysis show us that a firm with a high cost to use a project creates more product innovation than it does not.

Insider Trading, Macroeconomic Risk and Network Theory

A company insider possessing material nonpublic information can profit by trading in the stocks of her company. Moreover, since in an interconnected economy shocks propagate from one firm to another, she can also profit by trading in stocks of connected firms (e.g. suppliers and customers). In this article, I will show that these “network trades” create a moral hazard problem because they allow insiders to profit from risk-creation. In particular, by investing in a riskier project an insider produces larger fluctuations in the stock price of her company and of the connected firms. She can then use her privileged position to obtain early information on the direction of these fluctuations and then profit by engaging in network trades. Most importantly, the insights from network theory reveal that risk creation is more profitable for insiders that operate in industries that have a larger impact on macroeconomic risk, and hence network trades can play a key role in increasing the overall level of risk to which the economy is exposed. Given the severity of the 2007-2009 crisis, this insight offers a new and powerful rationale for regulating trades made by insiders on private material information. In particular, I advocate a reform divided in two steps: In a first phase, disclosure of network trades should be mandated to investigate whether they are a pervasive phenomenon and whether they produce abnormal returns for the insiders. In a second phase, if the data suggests that network trades are indeed pervasive and lead to abnormal profits, the following reforms should be implemented: (i) network trades on private material information should be banned, at least in the most central sectors; (ii) the rule requiring insiders to disgorge short-term profits when trading in the stocks of their corporation should also be extended to network trades.

Income in jeopardy: How losing employment affects the willingness to take risks

Abstract Identifying the determinants of risk-taking is crucial for our understanding of a variety of choices. Using German panel data, we find that people become more risk-averse when losing work. The immediate income loss does not mediate this effect. It seems also unrelated to the loss of non-monetary benefits of work and to changes of worker’s emotional state. However, we find that risk aversion responds the more strongly to losing work the more future income is at stake, and that the effect manifests itself already on the eve of job loss when people do not yet suffer from the consequences of the event. We conclude that lower future income expectations and more uncertainty about future incomes may explain the effect of job loss on risk attitude. Our results might imply that a recession may reinforce itself as it induces people to fear job loss, which raises their risk aversion and might therefore reduce the willingness to invest in risky projects. Moreover, self-assessed risk attitude seems to measure absolute risk aversion and thus not only an underlying risk preference parameter.

The Effect of Stock Pledge on Enterprise Innovation: Based on the Adjustment Effect of Monetary Policy Uncertainty

In recent years, stock pledge financing becomes an important kind of financing means of listed companies’ controlling shareholders. However, pledge financing can also increase the risk of losing control rights faced by controlling shareholders, as well as bring cash flow to them at the same time. Thus the controlling shareholders of listed companies may change their operational decisions to reduce this risk. The enterprise is the main body of economic growth, while innovation is the important source of the enterprise to improve productivity. Unlike capital investment, innovation investment faces a higher risk, which needs a long-term stable source of funding but comes a lower short-term return. Therefore, under the background of stock pledge, how do the controlling shareholders of listed companies treat the high-risk innovation investment? Since the financial crisis, the frequent adjustment of monetary policies in our country leads to an uncertainty expectation, which exacerbates the instability of the stock market and worsens the financing environment of the enterprise. With the increase of monetary policy uncertainty, how does controlling shareholders’ stock pledge affect innovation? It is worth finding answers to such a question, which has a strong practical significance on creating a good innovation environment and maintaining the stability of the capital market. Leveraging a sample of A-share listed companies from 2005-2015, this paper investigates the relationship between controlling shareholders’ behavior and enterprise innovation, and the adjustment effect of monetary policy uncertainty. The results show that controlling shareholders’ stock pledge leads to a decrease in enterprise innovation, and this inhibiting effect will be sustained for a long time. Monetary policy uncertainty strengthens the negative relationship between stock pledge and enterprise innovation. Furthermore, compared with the strategic innovation, we find that controlling shareholders’ stock pledge has a stronger inhibitive effect on substantial innovation. Considering the mechanism of stock pledge on innovation, we find that risk-taking and financial constraints are two transmission channels between stock pledge and innovation. We advance the literature in several ways. First, we broaden the literature of controlling shareholders’ behavior on the economic consequence of enterprise investment and financing decisions. In addition, we enrich the mechanism of stock pledge on enterprise innovation. Based on the myopia theory and the agency theory, our research finds that there are two transmission channels between stock pledge and enterprise innovation: （1）After pledging the stock, controlling shareholders may force listed companies to avoid risky project for decreasing the volatility of stock price. Then the risk profile of listed companies decreases, resulting in a lower innovation level. （2）After pledging the stock, the agency conflict becomes stronger, which increases the financial constraints faced by listed companies, resulting in a lower innovation level. Second, we distinguish the different types of innovation to examine the different effects of stock pledge, which extends the literature of enterprise innovation. Third, we further examine the effect of the dynamic adjustment of monetary policies on the negative relationship between stock pledge and enterprise innovation, which contributes to the macroeconomic policy and enterprise behavior research.

Director and officer liability protection and firm value: Unintended consequences

This study sheds light on some of the unintended consequences of directors’ and officers’ (D&O) liability protection provisions. In particular, it examines whether D&O protection affects firm value. Using a sample of U.S. firms, we find that firms with greater director liability protection have significantly lower firm value as measured by Tobin's Q, and that the negative effect of director liability protection on firm value is more pronounced in the period before the Sarbanes-Oxley Act of 2002. These findings are consistent with the notion that director liability acts as a strong corporate governance mechanism and that protecting directors and officers does not preclude them from undertaking sub-optimal investments and less risky projects.

A iconotopia de Sofia Borges: curadoria como produção do lugar para as imagens críticas

A expografia criada por Sofia Borges a convite do curador da 33a Bienal de Arte de São Paulo produz uma heterotopia de imagens, um lugar onde imagens liberadas dos enquadramentos institucionais aos quais estão submetidas exercem contraposicionamentos. Uma liberação de imagens pode ser obtida por meio de determinados procedimentos praticados pela artista no arriscado projeto de curadoria autoral.

The Impact of Business Cycle on Banks’ Capital Buffer, Risk and Efficiency: A Dynamic GMM Approach from a Developing Economy

This article applies the generalized method of moments (GMM) to examine the relationship between capital buffer, risk and efficiency adjustments over the macroeconomic cycles. Using a panel dataset of 32 Bangladeshi commercial banks over the period from 2000 to 2014, we find an inverse relationship between the business cycle and capital buffers, while a positive relationship between the business cycle and bank risk. These findings support the implementation of countercyclical capital buffers in Basel III Accord to ensure bank safety during economic downturns. We also observe that the bank efficiency positively responds to macroeconomic fluctuations. While examining the impact of capital buffers on bank behaviour, we find that low buffer banks raise the level of capital buffers and improve the efficiency over time. In contrast, high buffer banks incline to raise investment in risky projects by deterioration of capital ratios during economic upturns. In this case, high buffer banks in developing countries should take risk and efficiency issues into great consideration and force low capitalized banks to follow the Basel III guidelines more stringently to adjust capital buffers, risk and efficiency with macroeconomic bounce. Also, developing countries, regulatory bodies are adopting and implementing Basel guidelines slowly, and thus it has volunteer impact on the buffer, risk and efficiency adjustments. So the regulatory bodies should be adapted the global financial changes that will be enhanced country’s financial market.

Signaling game models of equity financing under information asymmetry and finite project life

We develop the real option signaling game models of equity financing of a risky project under asymmetric information, where the firm quality is known to the firm management but not outside investors. Unlike the usual assumption of perpetuity of investment, we assume that the time window of the investment opportunity has a finite time horizon. The firm chooses the optimal time to issue equity to raise capital for the investment project. The number of shares of equity issued to fund the project depends on the outside investors’ belief on the firm quality. The low-type firm has the incentive to sell overpriced securities through mimicking the investment strategy of the high-type firm in terms of investment timing and number of equity shares. On the other hand, the high-type firm may adopt the separating strategy by imposing mimicking costs on the low-type firm. We examine the incentive compatibility constraints faced by the firm under different quality types and discuss characterization of the separating and pooling equilibriums. We also explore how the separating and pooling equilibriums evolve over the time span of the investment opportunity. The information costs and abnormal returns exhibit interesting time dependent behaviors, in particular, at time close to expiry of the investment opportunity.

The dependence of the incremental risk rate of interest on absolute risk aversion - Applying the Laplace transform to risk preference evaluation

In this paper we base our study on the application of the Laplace transform to risk preference theory. With a constant measure of absolute risk aversion (Pratt, 1964; Arrow, 1965), the Certainty Monetary Equivalent (CME) of a risky project previously has been developed into an expression involving the logarithm of the bilateral Laplace transform of the probability density of its stochastic economic outcome. The internal risk aversion (IRA) is the break-even level of the absolute risk aversion, between making the project favourable or unfavourable.Below, we apply this methodology to determining an expression for the incremental risk rate of interest in the case of standard investments with payments having probability distributions. A simple approximate formula is derived explaining how the incremental risk rate of interest depends on the absolute risk aversion and the discount rate, i.e. on measures of risk preference and of time preference.

Scheduling Construction Processes Using the Probabilistic Time Coupling Method III

The paper presents modelling of construction project schedules using new method: Probabilistic Time Coupling Method III (PTCM III). It is presented in EXCEL application with a description of the calculation scheme. The correctness of the PTCM method was checked by comparison with the results obtained for the same data in the Risky Project Professional (RPP) program. As a result of the analysis, it was found that the PTCM III method is the closest to the RPP, taking into account the beta distribution of the probability of times. Mean absolute percentage error (MAPE) is less than 1%, so it can be assumed that the matching of these two calculation methods is excellent.

Disciplining Entrenched Managers Through Corporate Governance Reform: Implications for Risk-Taking Behavior

Research Question/Issue: This paper examines how enhanced monitoring by corporate boards following the passage of the Sarbanes-Oxley Act of 2002 and concurrent reforms to stock exchange rules (SOX) mitigated risk-related agency conflicts prevalent in entrenched firms. Research Findings/Insights: Post SOX, entrenched firms increased risky and value-enhancing investments. These investments were financed by reductions in financial slack and dividend payouts, and by lower cost of debt. The specific mechanism driving the positive changes in corporate policies of entrenched firms is the SOX requirement of an independent compensation committee. Managers of entrenched firms previously non-compliant with this requirement are rewarded with more equity-based pay after SOX, which strengthened their incentives to pursue value-creating riskier investments. Only firms with low information asymmetry benefit from this requirement. Theoretical/Academic Implications: The paper provides evidence of a disciplining effect of the critically important governance legislation on firms with entrenched management. The findings suggest that, by imposing an additional layer of discipline on managers, SOX increased managers' willingness to take on riskier, but more value-enhancing projects that were previously stifled in entrenched firms. The paper underscores the roles of an independent compensation committee and information cost in alleviating managerial risk avoidance. Practitioner/Policy Implications: The paper has implications for the ongoing debate among policy-makers and legislators on the costs and benefits of SOX and for future governance reforms. Legal enforcement of stricter board requirements can realign investment policies with shareholders' interests even in the presence of value-reducing firm-specific arrangements that entrench managers. However, majority independent board and fully independent audit and compensation committees do not rein in CEO's risk aversion. It is a fully independent compensation committee that is instrumental in incentivizing CEOs to pursue risky projects that also add value. Firms and policy-makers need to be aware that the effectiveness of the independent compensation committee in designing optimal pay policies depends on the access to timely and accurate information. Other mechanisms need to be considered to enhance risk-taking in entrenched firms operating in high cost information environment.

Impact assessment of a support programme of science-based emerging technologies

The impact assessment of support programmes of science-based emerging technologies requires the analysis of several dimensions of performance, as these programmes refer to used-inspired basic research which is linked to basic research as well as to technological application. Bibliometric analysis proves to be a useful tool for capturing different aspects of performance. In the specific programme “future emerging technologies”, interdisciplinarity turns out to be crucial for achieving excellent and creative outcomes. Furthermore, the orientation on risky projects yields some excellent results, but few failures.

Risk assessment on offshore photovoltaic power generation projects in China based on a fuzzy analysis framework

China has begun to promote offshore photovoltaic in coastal areas taking its advantages of saving land resources and proximity to load centers. However, the projects are bound to face a series of risk factors as the industry is in its infancy. This paper conducts a risk assessment on offshore photovoltaic power generation projects in China based on a fuzzy framework. Firstly, 16 risk factors affecting offshore photovoltaic power generation projects in China are identified and classified into 4 groups. Secondly, a risk assessment model is constructed involving Hesitant Fuzzy Linguistic Term Sets, Triangular Fuzzy Number and Fuzzy Synthetic Evaluation. Thirdly, this paper conduct an empirical study of China, and the result shows that the risk level of offshore photovoltaic power generation projects in China is medium high. Finally, some response measures are proposed. The risk index system and corresponding countermeasures can provide a reference for project managers to allocate resources to prevent risk events. Besides, the risk assessment model can help project investors to avoid too risky projects. In addition, the risk assessment on offshore photovoltaic power generation projects in China has not been discussed by scholars yet. Thus, this paper contributes to the literature and expand the knowledge.

Methodology for determining the most severe risks of a construction project and identification of risky projects

DOI: 10.7764/RDLC.17.3.423 Construction projects involve very different kinds of risks of distinct natures and demand an agile and flexible risk assessment methodology. This study has analyzed scholarly literature and best practices to find current weaknesses. Two main solutions are presented in this paper in response to the findings of the analysis: a general purpose, quantitative key risk indicator, the “Risk Visibility Factor” (Fv), that yields a single linear 0-100 value for each risk event out of its impact and likelihood; and a summarizing method based on Fv to obtain the overall risk for two or more risk events, expressed as a single equivalent risk event with its own impact and likelihood. The first solution improves current risk assessment by providing a more intuitive and understandable indicator to rate risks and projects; the second one, with recursive capability, allows risk scenarios (e.g., projects) to be seen as single risk event, without any kind of limitation on the number and nature of risks, making it easier to compare the risk severity of distinct projects. Both solutions can be used to define the risk appetite and to compare with it any risk event or scenario.

Does a deposit insurance scheme induce moral hazard among bankers? Evidence from an experiment with bankers

The implementation of a deposit insurance scheme entails a trade off. On one hand, as shown in theoretical and empirical studies, a deposit insurance scheme reduces the likelihood of a bank run. On the other hand, a deposit insurance scheme induces moral hazard among bankers that may lead to bank failures. We rigorously test the effect of different deposit coverage limit and the implementation of a differential premium treatment on bankers’ behaviors in the deposit and credit market. We do so by designing a laboratory experiment that involves real bankers as participants. We find that the coverage limit treatments do not have any effect on deposit rate offer. Nevertheless, we find that a high deposit coverage limit induces smaller banks to have a higher share of risky projects. This is evidence of moral hazard particularly among small banks.