Uncertain Investments Research Articles

Asset pricing and the carbon beta of externalities

Climate policy needs to set incentives for investors who face imperfect, distorted markets and large uncertainties about the costs and benefits of abatement. These investors decide on uncertain investments according to their expected return and risk (carbon beta). We study carbon pricing and financial incentives in a consumption-based asset pricing model distorted by technology spillovers and time-inconsistency. We find that both distortions reduce the equilibrium asset return and delay investment in abatement. However, their effect on the carbon beta and the risk premium for abatement can be decreasing (when innovation spillovers are not anticipated) or increasing (when climate policy is not credible). We show that the distortions can be overcome by modified carbon pricing by a regulator, or by financial incentives, implemented in our model by a long-term investment fund. The fund pays a subsidy to reduce technology costs or offers financial contracts to boost investment returns to complement the carbon price. The investment fund can thus pave the way for carbon pricing in later periods by preventing a capital misallocation that would be too expensive to correct, thus improving the feasibility of ambitious carbon pricing.

Does it pay to think about the future? Future orientation, ideology, age and vote earning among political candidates

Solving societal problems often requires elected politicians to make uncertain investments, which only provide benefits in the future. However, research on future-oriented democratic policymaking has primarily focused on structural explanations and voter behaviour, paying less attention to politicians’ attitudes. In this study, we examine politicians’ future orientation and its potential link to electoral success. Using the latest Finnish data from the Comparative Candidate Survey, combined with voting-advice application data and register-level candidate information, we analyse how candidates’ future orientation correlates with their personal vote shares and ideological positions in the 2019 parliamentary elections. Our findings indicate that future-oriented political candidates, willing to invest in the future despite costs to present wellbeing, tend to be younger, more leftist and green-alternative-liberal. However, the relationship between future orientation and vote-winning is weak, suggesting that office-seeking politicians face neither punishment nor reward for their future-regarding stances.

The Portfolio Analysis in Hong Kong Stocks

Maximizing returns is always peoples investment goal. Stocks have some hedging capabilities, and their prices also fluctuate widely, making them popular in-vestments for investors. As a result, Stock prices have fluctuated wildly, leading to uncertain investments and uncertain returns. To compute and analyze the maximum returns of stocks in Hong Kong stocks, this paper takes The Hang Seng index, an important indicator of Hong Kong stock market prices as the scene. We calculate the variance of these stocks using the Fama experiment. And We examined the normal distribution and i.i.d. of the data. To test whether the hypothesis of independence and the same distribution in the data is reasonable, and then con-duct an ACF test on the five selected stocks to observe their time-series stability. Then, this paper uses Markowitz's effective frontier decision-making process to simulate stock trading and use the Sharp ratio risk analysis to select mid-risk and high-yield portfolios. The results show that: The weight of the five stocks shows an approximate trend with their average return rate. The larger the average value is, the larger the investment proportion will be. stock investment with low-risk accounts for a relatively high proportion, while stock investment with high-risk accounts for a relatively small proportion. Among the selected several representative stocks, Techtronic Industries and Long for Group have more investment value, while the investment value of bank stocks is on the low side.

The impact of polarity score on real option valuation for multistage projects

In most cases, the valuation of the investments characterized by various stages with a high level of uncertainty is done through the compound real option valuation (ROV). This decision making support can consider various types of uncertainty that can affects these investment phases, such as that linked to technology. Specifically, within the category of uncertain investments there are the broadband opportunities that can be valued as real options in order to quantify the risks associated with the investment. However, since ROV theory has no definitive way to determine model parameters based on market information, we propose one that can adjust them dynamically. In this paper, to include this aspect in the project valuation, we have unified the ROV with the sentiment analysis, a natural language processing technique that allows us to quantify the polarity of expressions in natural language numerically. In particular, the inherent risks related to the different phases of the project can be extracted from the information present in the surrounding environment and published in newspapers. From there, we obtain a sentiment score which, through appropriate manipulations, manages to modify the evaluation of the success probabilities of each stage. Then, we embed these success probabilities in the ROV in order to provide a valuation methodology that includes the impact of information on the investment decision.

An Options Game approach to valuate broadband projects in a smart city context

Broadband projects nowadays represent a valid investment alternative to pursuing smart city goals, particularly considering the rapid development that has affected the telecommunications industry. However, for potential investors, the valuation of these projects is a demanding activity because they are characterized by the uncertainty of future user demands, the competition risk, and the sequential nature of investment. In this paper we propose an innovative methodology to valuate the broadband projects taking into account these three peculiarities. This model consists of combining the compound real options approach (ROA), able to price the sequential uncertain projects, with the Options Game (OG) approach used in the literature to valuate uncertain investments affected by competition risk. This paper contributes to the existing literature by expanding the OG model to fit the broadband characteristics in discrete time. We also propose a case study to implement the theoretical approach. Results show that, despite their uncertain nature and competition risks, broadband investments represent a profitable investment alternative when pursuing smart city goals.

Strategic evaluations and mining process optimization towards a strong global REE supply chain

Rare earth elements (REE) have turned from an inconspicuous group of raw materials to critical commodities in the last decade. The insatiable and continuously growing demand for rare earths combined with their small and opaque market has resulted in a global exploration boom that has led to the delineation of extensive resources on every continent. Nevertheless, the special boundary conditions that govern the REE industry require second thoughts and careful evaluations when it comes to the potential exploitation of such resources. Past mistakes, with respect to environmental impacts and uncertain investments, have resulted in an overall uncertainty whether the mining and beneficiation of rare earth elements can be a viable industry in a free market context. This paper attempts to record the erroneous practices of the past and use them as guidelines to strengthen the global REE supply-chain. Moreover, the paper focuses on the assessments that need to be made in order to optimize the mining process and reinforce the growth prospects of the market. An overall assessment tool for the mineability of rare earth deposits is also used to consolidate these evaluations and answer the question, if REE mining can be sustainable.

Project Economics in the Big-Bets Industry: The Integrated Valuation in Practice

Value creation from petroleum projects is uncertain. Yet, even with great odds of failure, companies increasingly take on these ventures. Here, no analytics could cut failures out. We could only avoid loss by avoiding poor investment decisions. In practice, most valuations use inconsistent principles that potentially obscure the value–maximizing decisions. For example, when drilling for hydrocarbons most firms decide which opportunity to drill based on their expected value—calculated from values of multiple outcomes, each with different levels of uncertainty but traditionally evaluated with a single discount rate. The all-inclusive discounting could lead to biases and poor decisions. In this paper, we discuss the shortcomings of the traditional approach and implement a coherent method of integrated valuation that, while more detailed, excels in valuation of uncertain investments.

Have the New Factor Models Improved on the Theory Front? Evidence from Decomposing Asset Growth

Contrary to the theoretical foundations of the asset-growth factor in both the Fama and French (2015) five-factor model and the q-factor model of Hou, Xue, and Zhang (2015), this study finds that investment level per se is not the reason asset growth is negatively associated with future stock returns. Instead, the source of the negative return predictability is the structure of the investments–specifically, the division of total investments between those that are carried on the balance sheet, versus those that are off the balance sheet, and is endogenously linked with uncertainty because accounting standards prohibit highly uncertain investments from appearing on the balance sheet. This study also sheds new light as to why these different types of investments are related to future stock returns in opposite directions: the fundamental difference is not a function of their tangible versus intangible nature; rather, it is their placement in the financial statements. As such, the opposite directionality represents two sides of the same coin.

Toward a behavioral theory of real options: Noisy signals, bias, and learning

Research Summary: We develop a behavioral theory of real options that relaxes the informational and behavioral assumptions underlying applications of financial options theory to real assets. To do so, we augment real option theory's focus on uncertain future asset values (prospective uncertainty) with feedback learning theory that considers uncertain current asset values (contemporaneous uncertainty). This enables us to incorporate behavioral bias in the feedback learning process underlying the option execution/termination decision. The resulting computational model suggests that firms that inappropriately account for contemporaneous uncertainty and are subject to learning biases may experience substantial downside risk in undertaking real options. Moreover, contrary to the standard option result, greater uncertainty may decrease option value, making commitment to an investment path more effective than remaining flexible.Managerial Summary: Executives recognize the need to make uncertain investments to grow their business while mitigating downside risk. The analogy between financial options and real corporate investments provides an appealing method to consider the practical challenge of such investment decisions. Unfortunately, the “real options” analogy seems to break down in practice. We identify how a second form of uncertainty confounds real options intuition, leading managers to overestimate the value of uncertain investments. We present a behavioral real options model that accounts for both forms of uncertainty and suggest how uncertainty interacts with behavioral bias in the option execution/termination decision. Our model facilitates assessment of the conditions under which investments in uncertain opportunities are usefully considered as real options, and provides a means to evaluate their attractiveness.

Risk Disclosure and Corporate Innovation

Using textual analysis of 10-K filings for US firms, we find that the SEC mandate for risk disclosure has a negative effect on both inputs and outputs of corporate innovation, with no corresponding decrease in other less risky investment. By exploiting two SEC regulation changes as quasi-natural experiments, we conduct differences-in-differences and regression discontinuity design tests and identify that it is the mandate for risk disclosure that reduces corporate innovation. Further analysis shows that risk disclosure having a larger negative impact on innovation among firms with financial constraints. These results are consistent with theoretical predictions that increased disclosure can have unintended consequences for firms making uncertain investments, such as innovation.

Knowledge Resources, Spinouts and Exit through Acquisitions

Research suggests that successful acquisitions begin with the selection of the ‘right’ target firm. Our study offers new insights for the literature on acquisitions by focusing on spinouts as a unique subset of target firms. Spinouts have increasingly been identified as attractive targets for acquisitions in high technology industries where the pace of innovation and new product development often involves large and highly uncertain investments. Spinouts are recognized for their unique resources that distinguish them from established firms and other new entrants into industries. This study adopts a resource perspective to examine the impact of the knowledge heritage and product strategies of spinouts from different knowledge contexts on the their potential to be acquired by firms in both the focal industry and downstream industries. Overall, our findings support our proposition that the knowledge heritage of spinout ventures represents an important resource that affects evaluations concerning acquisitions.

I did it your way. An experimental investigation of peer effects in investment choices

We experimentally investigate imitation in investment choices and focus on cognitive aspects of decision making. At this aim, we manipulate three main dimensions of choice: time pressure, normative content of social information, and uncertainty of the investment. We document the existence of imitation. In line with our hypotheses, a piece of information which is more representative of average group behavior induces stronger imitation. Furthermore, higher time pressure fosters imitation. In contrast to our hypothesis, imitation is weaker for uncertain investments than for risky investments.

Strategic evaluations and mining process optimization towards a strong global REE supply chain

Abstract Rare earth elements (REE) have turned from an inconspicuous group of raw materials to critical commodities in the last decade. The insatiable and continuously growing demand for rare earths combined with their small and opaque market has resulted in a global exploration boom that has led to the delineation of extensive resources on every continent. Nevertheless, the special boundary conditions that govern the REE industry require second thoughts and careful evaluations when it comes to the potential exploitation of such resources. Past mistakes, with respect to environmental impacts and uncertain investments, have resulted in an overall uncertainty whether the mining and beneficiation of rare earth elements can be a viable industry in a free market context. This paper attempts to record the erroneous practices of the past and use them as guidelines to strengthen the global REE supply-chain. Moreover, the paper focuses on the assessments that need to be made in order to optimize the mining process and reinforce the growth prospects of the market. An overall assessment tool for the mineability of rare earth deposits is also used to consolidate these evaluations and answer the question, if REE mining can be sustainable.

Risk Trading and Endogenous Probabilities in Investment Equilibria

A risky design equilibrium problem is an equilibrium system that involves $N$ designers who invest in risky assets, such as production plants, evaluate these using convex or coherent risk measures, and also trade financial securities in order to manage their risk. Our main finding is that in a complete risk market---when all uncertainties can be replicated by financial products---a risky design equilibrium problem collapses to what we call a risky design game, i.e., a stochastic Nash game in which the original design agents act as risk neutral and there emerges an additional system risk agent. The system risk agent simultaneously prices risk and determines the probability density used by the other agents for their risk neutral evaluations. This situation is stochastic-endogenous: the probability density used by agents to value uncertain investments is endogenous to the risky design equilibrium problem. This result is most striking when design agents use coherent risk measures in which case the intersectio...

Economics of motion pictures: the state of the art

The motion-picture industry, with its global economic reach and high-stakes highly uncertain investments, transforms creative talent and inputs into multi-billion-dollar profits. The high-profile institutions, operations, exhibition patterns, distribution channels, and marketing strategies present opportunities to explore a wide range of economic research questions. Financial data, particularly on box-office and other revenue sources, provide researchers with a unique opportunity to gather extensive evidence and uncover empirical regularities that yield fundamental insights into strategic investment, organizational design, incentive-compatible contracting, product design, advertising, and cross-cultural consumer experiences, among other areas of basic economic research. This special issue comprises five papers that explore some of these areas, creatively exploiting publicly available data and well-documented industry institutions. The first paper presents evidence on financial outcomes for remakes, an alternative form of brand extension. The second paper studies sequel films in the

The Tourinho model: neglected nugget or a receding relic?

This article evaluates Tourinho's (1979b) work as one of the earliest contributors to the real options literature. His model pioneered the application of risk neutrality to uncertain investments, but his originality of introducing an option-holding cost albeit to overcome the extraction paradox is rarely imitated. We claim that the combination of a convenience yield and an option-holding cost produces a more satisfying representation. Moreover, variations in the holding cost give rise to a host of investment decisions ranging from the standard real option solution for a zero-holding cost to a net present value solution for an infinite-holding cost. Not only does the holding cost mediate between these two poles, but it provides the option seller (usually a landowner or a government) with a policy instrument for influencing the extraction timing and thus the extraction profit of the option buyer. We derive the holding cost that optimizes the landowner's combined value of the option premium, holding costs and eventual royalties.

Real options Valuation of Uncertain Investments Decision-making between 4G LTE and 4G WiMAX Mobile Network in Telecommunications Industry

In recent years, the world’s mobile market is transformed by E-3G UMTS and 4G mobile networks. Typically, infrastructure costs and revenue are two critical factors of any decision-making in regard to investment in 4G mobile network industry. The objectives of the study are categorized as follows: (1) to introduce real option theory and to discuss its applicability as a decision support tool, (2) to apply the real option approach into the selected two case studies so as to compare and show the advantage of option pricing model applied in 4G mobile networks in order to cope with investment uncertainty between LTE and WiMAX. Consequently, real option analysis is capable of providing managers a strategic tool to enhance the valuation of investment opportunities.

Increased Unengaged Monitoring and Shifts in Investment Time Horizons of U.S. High-tech Firms

The strategic governance literature argues that stringent monitoring of firms can reduce information asymmetry, thereby increasing executives’ long-term orientation. However, monitoring that involves limited interaction between monitors and executives, which we refer to as unengaged monitoring, reduces information asymmetry about short-term activities without reducing information asymmetry about uncertain long- term activities. Unengaged monitors’ emphasis on current activities creates earnings pressure that increases employment risk and shifts managers’ preferences away from uncertain long-term investments. This paper assesses how the 2002 Sarbanes-Oxley Act affected U.S. firms operating in high- technology sectors, showing that greater unengaged monitoring often reduced R&D and increased short-term investments. The shift of time horizons was strongest for firms with higher managerial discretion and/or lower technological competition, where monitors face greatest ambiguity about long-term investments.

Preserving 'Debt Capacity' or 'Equity Capacity': A Dynamic Theory of Security Design under Asymmetric Information

We model a firm in which early investors are less informed than insiders, but better informed than new investors about the firm's prospects. This allows early investors to dictate terms in new financing rounds. They monetize on this power by steering the firm towards issuing equity. Anticipating adverse selection and underinvestment in future financing rounds, firms optimally engage in relationship financing through debt-like contracts and building up equity capacity. Long-term credit lines are an alternative only for small and less uncertain investments. Our results highlight the different financing pecking orders in firms dependent on relationship lending and venture capital financing.

Integrated method for assessing and planning uncertain technology investments

We propose a method for assessment and planning of uncertain technology investments, in the context of corporate venture capital. It addresses three main issues. It is an integrated approach that starts from the technology, and proceeds to exhaustively cover the entire process that precedes valuation; it explicitly supports the identification of synergies between parent corporation and technology venture; it provides an improved treatment of uncertainty, adopting a broader view on the identification of uncertainty and sources of managerial flexibility, and starting to address it sooner, in the opportunity development phase. It is facilitated by a suite of practical tools. We provide a detailed description of the method and demonstrate its application with an illustrative case study.