Risky Projects Research Articles

The wrong kind of information

AbstractAgents, some with a bias, decide between undertaking a risky project and a safe alternative based on information about the project's efficiency. Only a part of that information is verifiable. Unbiased agents want to undertake only efficient projects, but biased agents want to undertake any project. If the project causes harm, a court examines the verifiable information, forms a belief about the agent's type, and decides the punishment. Tension arises between deterring inefficient projects and a chilling effect on using the unverifiable information. Improving the unverifiable information always increases overall efficiency, but improving the verifiable information may reduce efficiency.

DETERMINANTS OF FINANCIAL PERFORMANCE OF LISTED DEPOSIT MONEY BANKS IN NIGERIA

This paper seeks to address some factors influencing the financial performance of listed DMBs in Nigeria as the industry has a crucial role to the growth and development of the nation. The major goal of this study was to examine, using secondary data the determinants of financial performance of DMBs with international operating license between 2010 and 2020. Analysis was carried on 8 listed banks using secondary data, correlation and ex-post factor research design. According to the study's findings, all of the indicators have a large impact on the financial performance of the listed financial banks, with the exception of liquidity risk, which has no significant effect. It is therefore recommended that the management of listed DMBs strictly concentrate on investing in lower risky projects, developing and adopting an effective internal control system with clear policies and procedures and to also adhere to CBN directives in maintaining a certain capital adequacy ratio and to checkmate some internal management factors that led to a significant but negative relationship between ROA and LR as the relationship is expected to be significant and positive. This would assist them in achieving their objectives and prevent liquidation and bankruptcy.

Modelling credit and investment decisions based on AI algorithmic behavioral pathways

This paper provides a new approach to understanding bankers' risk-taking behavior. We build upon prior studies that suggest artificial intelligence algorithms are an effective approach to obtaining this understanding. Our approach uses behavioral finance and a unique decision-making model. Although the decision-making literature is replete with descriptions and explanations of creditors and investors' perceptions and judgment, it does not provide an algorithmic model that incorporates a more flexible approach to how creditors subjectively valuate risky projects. Specifically, a model is presented where 33 corporate bankers realized ex ante that they were unable to accurately model the underlying uncertainty that characterizes a company's need for a loan. The results indicate that bankers' risk assessments result in different evaluations of financial information regarding loans. This approach depicts an integrative algorithmic modelling process, whereby limits in the amount of historical conditional information prohibit the use of more complex econometric techniques.

Financial Leverage, Information Quality, and Efficiency*

ABSTRACTWe examine information quality and financial leverage when an entrepreneur needs financing to undertake a risky project and his effort input affects the project's outcome. We show that information quality and financial leverage interact to play active roles in both investment and effort decisions. Our analysis shows a positive association between leverage and optimal information quality—when leverage is low (high), low (high) information quality is optimal. This is because with low leverage, the entrepreneur is already motivated by his large share of the outcome to exert effort, and high information quality is not efficient as a precise bad signal discourages the entrepreneur's effort. In contrast, when leverage is high and thus the entrepreneur is less motivated by his residual cash flows, high information quality is optimal, because a precise good signal encourages the entrepreneur's effort. Our study highlights the joint effect of information quality and financial leverage on overall efficiency through firms' effort inputs as well as on defining investment efficiency.

Information Aggregation via Contracting

ABSTRACTWhen a group of investors with dispersed private information jointly invest in a risky project, how should they divide the project's profit? We show that a simple contract dividing profits in proportion to investors' risk tolerances may facilitate information aggregation by altering investors' risk‐taking incentives when they decide on how investment strategies respond to private information. Our results provide a contracting‐based approach for information aggregation, which is an alternative to learning from endogenous market variables (e.g., prices) via contingent schedules as seen in well‐known rational expectations equilibrium models.

Production operations, financing and information asymmetry in a supply chain with a random yield

ABSTRACT This paper studies bank loan and advance payment in a random yield supply chain, consisting of one core manufacturer and one capital-constrained supplier who possesses private information on the supply state. With an information advantage, the supplier has a motive to hide his actual capital requirements to obtain more funds and shift to other risky projects. We focus on the credit contract design, which helps effectively prevent the supplier’s excess debt motive. We characterize the supplier’s best response, the optimal contract menus and all participators’ profits under information symmetry and asymmetry, respectively. By designing the credit contract, creditors can effectively prevent funds from flowing out of the supply chain in asymmetric cases. We then investigate the willingness of creditors to provide financing. Our findings show that the bank is always willing to provide financial support, regardless of the information state. However, the manufacturer’s willingness to provide a loan depends on the value of the supplier’s reservation profit. In addition, advance payment is preferable over bank loan for the supplier. Furthermore, we explore the value of information, illustrating that information harms the supplier but benefits creditors in most cases.

Risk analysis of construction a logistic centre in economic and environmental aspects

Purpose: The article attempts a qualitative risk analysis of the feasibility of the construction project of a logistics centre (a warehouse hall with a monolithic reinforced concrete structure), with particular emphasis on the implementation phase. Risk factors may have a negative impact on individual stages of the investment process, and when detected at the right moment, they can be minimized - which will beneficially contribute to changing the investor's risk level. Design/methodology/approach: The influence of selected risk factors on the scope of works carried out during construction was examined. Particular attention was paid to the time and cost of the investment implementation as well as its impact on the nearest natural environment. The analysis was carried out using modern tools supporting the engineer's work, including computer methods. The Norma PRO 4.75 cost estimating program was used, Microsoft Project supporting project management in terms of resources, time and finances, and Risky Project 7.2 used to manage project risk. Findings: The components of the construction process that are most exposed to the risk of failure were identified, and preventive measures should be taken against them. The main factors threatening the implementation of the project assumptions, having a significant impact on the extension of time and the increase in the costs of feasibility, include the risk of equipment failure, the risk of employee absenteeism and the risk of negative impact of the works carried out on the immediate natural environment. The key processes in the construction of the logistics centre turned out to be foundation works and assembly of structural elements, due to their complexity, labour-intensity, implementation time and high costs. Research limitations/implications: Research limitations result from the analysis of a deliberately selected case, which does not allow for formulating general conclusions. Nevertheless, the article refers to engineering practice and describes the challenges faced by the construction sector in the logistics industry. Practical implications: The information contained in the publication may be of interest to representatives of the business sector, students and doctoral students of technical faculties, analysing the impact of sustainable development on warehouse infrastructure and innovation of project systems in the national and international dimension. Originality/value: The publication covers the subject of construction logistics in the process of implementation of the project, as well as an analysis of selected risk factors, their definitions, and its reduction possibilities. Based on the project a qualitative risk analysis was performed, the result of this analysis was the identification of risks for which preventive measures should be introduced. After identifying the risk, it is recommended to be thorough estimation of risk factors and their evaluation, as well as planning the response to risk based on the selected model. Keywords: construction economics, infrastructure and environment, logistic centre, risk management. Category of the paper: Case study.

Overconfidence managers and the presence of leverage risk

In the presence of risky debt, the manager’s incentives change from refusing to accept projects with more risk (risk-shifting) and rejecting projects with less risk (risk-avoidance). Managers with all level confidence produce different biases of behavior about risk and uncertainty. The paper aims to analyze the influence of the debt to asset ratio (DAR) and managers’ overconfidence level on business risk. After extremely censored data 10 percent above, the type of pooled data collected is 3016 observation units of companies listed on the Indonesia Stock Exchange (IDX) period 2008–2019. Dummy regression was used for analysis with DAR, and level of overconfidence manager (high, upper middle, upper lower, low of overconfidence) is the explanatory variable, and business risk is the dependent variable. The presence of risky debt does not always produce risk-shifting, but in the reverse form is risk avoidance (underinvestment in risky projects). Managers fear losing their jobs and earning a bad reputation, and the results have distorted the managers’ all-level confidence role

Intuitionistic fuzzy risk adjusted discount rate and certainty equivalent methods for risky projects

Risk adjusted interest rate (RADR) method and certainty equivalent (CE) method are the two popular methods used under risky conditions in the investment analysis. However, it should not be forgotten that there may be a vagueness in the estimation of risk factors. In this study, novel RADR and CE methods are extended for use under uncertainty by using single valued intuitionistic fuzzy (IF) sets. All investment parameters are used as IF parameters. High speed rail and nuclear power plant investments given in the study were analyzed with IF-RADR and IF-CE methods. This study constitutes an important resource on how to analyze investments under risk with other fuzzy sets extensions. Another important aspect of the study is that the paper determines IF numbers consciously instead of assigning random fuzzy numbers and letting them be applied, e.g., IF-RADR and IF-CE values are determined to express the same vagueness and impreciseness. The study also includes an IF sensitivity analysis for a nuclear power plant investment problem. It is concluded with discussions and future research suggestions.

Management of regional development projects in the context of post-war reconstruction needs

In quarantine restrictions and active hostilities in most territories of Ukraine, the problems of activating the processes of virtual adaptation of enterprises, organizations, and institutions to new working conditions have become more acute. Moreover, it contributed to the acceleration of digital transformation processes, the transition of a significant part of workers to the remote format, the broader use of means of intellectual work, and the development of various management and remote communication programs. It is worth mentioning that in connection with the war of the Russian Federation against Ukraine, which is currently ongoing, most regional strategies, projects, and programs need to be updated, considering the current data on the economic, social, and ecological state of the territories after the victory, the final assessment of the damage and destruction. The paper considers the process of managing regional development projects in the context of the need for the post-war reconstruction of Ukraine. The study showed that in the structure of projects financed from the DFRD, most of them are aimed at the development of education (about 50% of all projects), sports (an average of 15%), housing, and communal services (10%), health care (12%), transport and road infrastructure (5%). Only a little share of projects (1.5%) has a creative direction. The principles of regional management are described, which should be transformed into criteria for selecting regional and territorial development projects that will be financed from the state budget, the budgets of territorial communities, and in the form of public-private partnerships. It was emphasized that the government of Ukraine created the Fund for the Restoration of Ukraine, funds to which all those interested in a quick victory and restoration of economic potential can transfer funds. It was determined that the search for additional resources for implementing local projects could become important in reconstructing regions on the ground. It was emphasized that necessary conditions for activating these processes are the creation of conditions for the development of small businesses and the imperative of state guarantees for investors, donors, and financial institutions in financing risky projects. It has been determined that there is a need to improve the qualifications of local authorities, self-government, and businesses regarding the possibilities of attracting various sources of funding for business projects and the requirements for them, as well as improving the skills of project management. Keywords: project, management of regional development projects, post-war reconstruction.

Explaining Chinese SOEs’ risk tolerance in the developing world: Evidence from Chinese hydropower investment in Cambodia

In recent years Chinese state-owned enterprises (SOEs) have become a major source of development finance in the developing world. Although some Chinese SOEs are risk averse, others endure high risk as a result of public backlash from projects they conduct in host states. Why are some Chinese SOEs more risk tolerant than others when engaging in investment projects in the developing world? In order to explain this variation, the author explores the domestic political economy underlying Chinese SOEs’ overseas investment decision-making, arguing that SOEs with increasing overseas market share are less likely to pursue risky projects, acting as responsible stakeholders in developing countries. To illustrate this hypothesis, the author investigates Chinese-financed hydropower projects in Cambodia, drawing upon original research records gathered in China and Cambodia between 2017 and 2020. Comparative case studies yield the following findings: First, SOEs with increasing market share are less likely to engage in hydropower projects with significant environmental and ecological impact; second, SOEs are less likely to take on risky projects with financing from Chinese policy banks. This article indicates that variation among Chinese SOEs will ultimately result in diverse outcomes for and reactions to Chinese state-sponsored infrastructure projects in the developing world. It also sheds light on the need for more effective regulation from the Chinese government to ensure Chinese SOEs’ responsible overseas investment.

Implicit government guarantees and bank risk

We develop a model on bank risk and implicit government guarantees. This model concerns the willingness and capacity of implicit government guarantees. Using the Option Pricing Theory, we derive a mathematical formulation of maximizing the bank’s net present value (NPV) with implicit government guarantees. Unlike previous work, both the loan portfolio and the bank’s NPV are regarded as a combination of options underlying the risky project. We conduct comparative static analyses and numerical examples to examine how implicit government guarantees and capital control affect bank risk and its asset scale. The main insight of our analysis is that implicit government guarantees have some unintended consequences: (a) Inefficient and excessive risk taking (including bank’s asset and overall risk); (b) Inefficient investment if there is no binding capacity constraint. We show that it is mainly due to the bank's excessive reliance on contingent assets. In addition, we demonstrate the ineffectiveness of capital constraint on risk control under certain circumstances. Therefore, we suggest that the gradual withdrawal of implicit government guarantees should be accompanied by multiple combinations of regulatory measures and proper institutional reform to avoid risk surges.

Entrepreneurial Orientation Dimensions and the Growth of Small and Medium Enterprises in Kenya

Entrepreneurial orientation is a process that entails a continuous process of decision making and activities or practices that lead to new venture creation. SMEs are important driving factors of economic growth, innovation and also a source of employment. Despite the many benefits of SMEs in our country, SMEs are still faced with many challenges which slow their growth with statistics showing that about 60% of SMEs die in the early stage and only a few grow to become large enterprises. The study examined entrepreneurial orientation dimensions adopted by SMEs and their role to sustainability of the growth of small and medium enterprises in Embu, Kenya. The study was based on the traits model theory. Descriptive research design was adopted for the study and a target population of 95 registered SMEs operating within Embu region was used. Stratified random sampling was adopted for sampling and a sample size of 58 SMEs was used. Primary data was collected through administering of questionnaire to the respondents while secondary data was sourced from journals, libraries, e-books and website. Data was analyzed using the SPSS software and regression and correlation analysis was used to make decisions and the final report. Growth of SMEs was accessed using the value of sales. The results of this study revealed that risk taking as a positive significance to the growth of small and medium enterprise in Embu County. The data had a p value of less than 0.05. The study recommends that entrepreneurs should also find an expert who will guide them as they plan to embark on any risky project to avoid unnecessary losses. Managers also should be willing to take advantage of any viable business opportunity in the market. Keywords: Entrepreneurial orientation, entrepreneurial orientation dimension, growth of SMEs, Embu county. DOI: 10.7176/EJBM/14-7-01 Publication date: April 30 th 2022

One-size risk-adjusted discount rate does not fit all risky projects

PurposeThe paper proposes using modified duration in calculating the proper risk-adjusted discount rate (RADR) to account for downside risk scenarios in capital budgeting.Design/methodology/approachThe paper shows how to use modified duration to summarize in a single number the bidimensional information about the inflows and terms in which they are charged in the use of the RADR. If a short modified duration characterizes the project, that is, the most relevant inflows are charged in short times, then discounting at RADR has mild effects on net present value (NPV). Else, if a long modified duration characterizes the project, discounting at RADR may have severe effects on NPV. The study proves that RADR's effectiveness increases with the project's modified duration.FindingsThe study builds a bridge between the regular NPV method used in academia and the RADR method used in the managerial context by identifying the proper RADR that leads the same NPV risk-adjustments, whichever method is used by including modified duration into the analysis.Practical implicationsThe results show how to select the proper RADR by reducing the subjectivity and increasing financial precision based on modified duration, thus providing an alternative to the norm. Simulations are used to make sensitivity analysis more effective and spotlight the main drivers in the risk-adjustments providing robust results.Originality/valueThis paper fulfils the gap between the RADR method and the expected net present value method by providing simple relations between the characteristic parameters.

On the paradox of mediocracy

AbstractWe consider a two‐agent hierarchical organization with a leader and a specialist in a reputation‐signaling model. The specialist proposes an innovative but risky project to the leader, and decides whether to exert an effort to improve the value of the project, which benefits the organization. The leader decides whether to endorse the project or block it. The leader's competence is her private information, and the market updates its belief about the leader's type based on observation of her action (endorsing the project or blocking it) and its outcome. In equilibrium, the leader could behave excessively conservatively when she is subject to reputation concerns. We have two main findings. First, aside from its usual distortionary effects, the leader's reputation concern has a beneficial effect by inducing the specialist to supply productive effort and improves the organization's performance. Second, there exists a nonmonotonic relationship between the perceived competence of the leader and the performance of the organization. As a result, a paradox of mediocracy emerges: The organization may benefit from a seemingly mediocre leader, as a mediocre leader motivates the specialist to exert effort, which offsets the efficiency loss due to incorrect decisions.

Experimentation in organizations

We consider a moral hazard problem in which a principal provides incentives to a team of agents to work on a risky project. The project consists of two milestones of unknown feasibility. While working unsuccessfully, the agents' private beliefs regarding the feasibility of the project decline. This learning requires the principal to provide rents to prevent the agents from procrastinating and free‐riding on others' discoveries. To reduce these rents, the principal stops the project inefficiently early and gives identical agents asymmetric experimentation assignments. The principal prefers to reward agents with better future contract terms or task assignments rather than monetary bonuses.

Аналіз науково-методичних підходів і концепцій інноваційних спільнот

Innovation is increasingly entering our lives, and its development rate is forcing innovation communities to appear and implement innovation faster. The article is aimed at studying the innovation communities concept, identifying their objectives and emphasizing the importance of their development. The scientific and methodological approaches to defining the essence of the innovation community have been analyzed. An innovation community is defined as a group of people united by a common goal to achieve their aims, and addressing pressing issues. The general features and components of innovation communities are considered, and the need for their creation is substantiated. It is determined that innovative communities help to solve problems by involving the opinion of the socially active population, thus making it possible to approach topical issues in more detail and make correct and agreed decisions. The principles of developing innovation communities are considered. Stages of developing innovation communities are defined as following: working groups, communities of practice, innovation communities. Emphasis is placed on the strengths and benefits of innovative communities (creating open communication; promoting learning; reducing risks when dealing with large or risky projects; increasing trust by taking into account every opinion, which, in turn, creates a comfortable atmosphere; creating open communication by organizing discussions and generating common and agreed ideas). An example of an innovation community is given, and the responsibilities of each participant are considered (trend scouts, technology scouts, competition scouts, content researchers, industry experts, clients, leading users, idea generators, analysts). A brief description of each participant and their tasks is given

ЗАДАЧА НА СОБСТВЕННЫЕ ЗНАЧЕНИЯ В ЭКОНОМИКЕ

The eigenvalue problem of finitedimensional transformations is very relevant in the economy, especially when a pandemic appears due to the spread of coronavirus and economic disasters. The authors propose an interpretation of the economic meaning of this task – the task of finding eigenvalues and eigenvectors of finitedimensional transformations. The existence of a certain set of valid eigenfunctions means that the eco–system is involved in the process of selfregulation: such a system is capable of producing an effect in the form of a vector collinear to the exogenous effect of this stimulus when a stimulus acts on it. If there are no such significant strategies, then every external influence will be functionally distorted by the system operator. An unpredictable reaction, aggravated by the dynamics of the eco–system, increases the investment risks inherent in it: it is actively exposed either to the risk of stagnation, or an unpredictable increase in the number of risky projects awaits it. By choosing, if possible, their own states, the researcher thereby reduces the risk function and increases the stability barrier of the normal functioning of the ecosystem. In this paper, from an economic point of view, the problems of proper numbers and eigenfunctions of the Fredholm integral operator, the differential operator "velocity", its square, the differential operator "acceleration", as well as pseudodifferential operators that play an important role in nonlinear models of economics are considered.

Passive syndicates and risk in venture capital investments

This paper presents a model in which a budget-constrained venture capital investor forms a syndicate and coinvests in a risky project. Assuming that syndication ameliorates competition among investors and that investee's outside option increases with investor competition, the model predicts that even if follower syndicate members are passive and do not add value to the project, the size of the syndicate is positively related to the maximum risk that the lead venture capital investor can tolerate.

Measuring the impact of risk on LCOE (levelized cost of energy) in geothermal technology

Geothermal technology has a high level of uncertainty and, thus, requires thorough risk analysis for economic decisions. The levelized cost of energy (LCOE) is a basic economic analysis widely used in determining an investment or energy mix. Many reputable institutions and government agencies provide LCOE, to which they apply different levels of discount rates to reflect project risk. To this end, the weighted average cost of capital (WACC) is frequently used as a proxy for project risk-adjusted discount rate. However, whether using a higher discount rate for a riskier project is appropriate in calculating LCOE has not been scrutinized. The purpose of this paper is to propose a certainty equivalent method of LCOE as an alternative way for considering risk. We present a theoretical background and formula based on the utility theory, improving the probabilistic LCOE estimation methodology of previous studies. We also perform scenario analysis to show how the certainty equivalent model changes LCOE reflecting different level of risk of the individual variables, which traditional LCOE does not. Additionally, we suggest that the traditional LCOE should be used prudently, recognizing it can distort the result when an individual project has a different level of risk from the industry average.