investment and uncertainty with time to build evidence from entry into u s copper mining abstract the standard real options model predicts that increased uncertainty discourages investment when projects are large and take time to build however that prediction can be reversed we investigate the investment uncertainty relationship empirically using historical data on opening dates of new u s copper mines large irreversible projects with substantial construction lags both the timing of the decision to go forward and the price thresholds that trigger that decision are assessed in particular we build upon a reduced form analysis to construct a structural model of entry we find that in this market greater uncertainty encourages investment and lowers the price thresholds for many mines

fixed capital adjustment is latin america different we examine capital adjustment patterns using two large and largely novel plant level data sets from the manufacturing sectors of colombia and mexico the data suggest that irreversibilities play a more important role than in more advanced economies however we do not find support for the presence of increasing returns in the adjustment cost technology such as arising from fixed costs firms go through periods of inaction and rarely sell capital but they do not invest at discrete times only an examination of the dynamic patterns of adjustment of factors differing in their flexibility supports this interpretation

management ownership and market valuation an empirical analysis we investigate the relationship between management ownership and market valuation of the firm as measured by tobin s q in a 1980 cross section of 371 fortune 500 firms we find evidence of a significant nonmonotonic relationship tobin s q first increases then declines and finally rises slightly as ownership by the board of directors rises for older firms there is evidence that q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder

a model of the financial firm with imperfect asset and deposit elasticities abstract the paper develops an intertemporal model to estimate the production technology of financial firms such as banks price taking is testable in each separate market for assets and liabilities and competitive price taking is a nested special case such tests are applied both to outputs and inputs empirical results for a sample of banks in new york and new jersey indicate that price taking applies only in markets for labor and time deposits in markets for loans demand deposits cash and materials the price taking hypothesis is not accepted

swedish norwegian tradable green certificates scheme design flaws and perceived investment barriers abstract the eu commission recommends using market based support schemes for renewable electricity projects one example is the swedish norwegian tradable green certificate scheme we examine whether design features in the norwegian part of this scheme specifically the scheme s short duration and the way it is to be abruptly terminated contribute to investors perceptions of barriers we apply econometric techniques on primary data collected in two surveys of norwegian investors in hydropower and we use real options theory to predict and interpret investors responses we show that 1 immediately after the scheme was introduced investors are eager to lock in future subsidies by investing immediately and concerned with factors that may delay the completion of their projects 2 as the certificate deadline neared investors have become increasingly pessimistic and concerned with economic and risk barriers investors in big hydropower plants with regulation reservoirs are particularly concerned with the risk of not completing their projects in time to gain the right to sell certificates these findings are consistent with the predicted responses to the scheme design derived from real options theory in contrast to earlier studies we find no difference in responses to the scheme design across investor types

market evidence on the effective maturity of bank assets and liabilities the recent years increase in interest rate volatility has intensified concern over the exposure of commercial banks to interest rate or funding risk since the effect of interest rate changes on the equity value of a bank depends on the maturity or duration of the bank s assets and liabilities assessing an individual bank s interest rate risk exposure requires information about the maturity composition of its portfolio it is difficult however to assess a bank s risk exposure from balance sheet data because several important asset and liability items have theoretically ambiguous effective maturities in a frictionless market a security s effective maturity will equal its stated maturity or time to repricing with market imperfections e g depositors transaction or information costs however the equilibrium cost of some deposit items may respond sluggishly or incompletely to market rate changes see hester and pierce 1975 or flannery 1982 such liabilities market values discounted at market rates would therefore fluctuate with the level of interest rates these liabilities are sometimes called core deposits which manifest sticky responses to market rate changes we define an asset or liability s effective maturity as the maturity of a fixed rate perfectly elastically supplied security with the same market value elasticity as the bank balance sheet item under consideration naturally a balance sheet item s effective maturity is the relevant determinant of its contribution to the bank s overall interest rate risk sensitivity

scale and scope economies in the multi product banking firm abstract the multi product nature of the banking firm is examined utilizing the translog cost function this analysis indicates that contrary to conventional wisdom natural monopoly scale economies and product specific decreasing costs are not robust characterizations of the banking industry there is however evidence that the cost function is characterized by economies of scope the implications of these results are discussed and extensions of this approach suggested

the effect of uncertainty on investment evidence from texas oil drilling this paper estimates the response of investment to changes in uncertainty using data on oil drilling in texas and the expected volatility of the future price of oil using a dynamic model of firms investment problem i find that i the response of drilling activity to changes in price volatility has a magnitude consistent with the optimal response prescribed by theory ii the cost of failing to respond to volatility shocks is economically significant and iii implied volatility data derived from futures options prices yields a better fit to firms investment behavior than backward looking volatility measures such as garch jel c58 d92 g13 g31 l71 q31 the real options literature beginning with marschak 1949 and arrow 1968 and developed in bernanke 1983 pindyck 1991 and dixit and pindyck 1994 explains how firms should make decisions about investments that involve sunk costs real options theory views such investments as options in that at any point in time a firm may choose to either invest immediately or delay and observe the evolution of the investment s payoff a key insight is that the option to delay has value when future states of the world with positive returns to investing and states with negative returns are both possible even holding the expected future return constant at its present level thus in the presence of irreversibility and uncertainty a naive investment timing rule proceed with an investment if its expected benefit even slightly exceeds its cost is suboptimal because it does not account for the value of continuing to hold the option instead firms should delay irreversible investments until a significant gap develops between the investments expected benefits and costs moreover as uncertainty increases real options theory tells us that the incentive to delay should grow stronger and the gap between the expected benefit and cost necessary to trigger investment should widen while real options theory therefore prescribes how firms should carry out irreversible investments in uncertain environments it is not empirically well known

industry wide versus firm specific uncertainty and investment british company panel data evidence this paper presents evidence on the prediction that the impacts of firm specific and industry wide uncertainty on investment will be different results show that these work in opposing directions and that the effect of industry specific uncertainty is stronger in concentrated industries

the role of financial development in exchange rate regime choices abstract we make the first attempt in the literature to empirically investigate the role of financial development in the choice of exchange rate regimes using a binary choice model we first show that financially less developed countries are more likely to adopt a fixed exchange rate to further examine the impact of financial development on the conditional probability of exiting from an existing pegged system to a flexible one we then employ hazard based duration analysis we find strong evidence that countries with higher levels of financial development are more likely to exit a pegged system and interestingly financial development only matters to orderly exits but not disorderly exits our results are robust to controlling for endogeneity and sample selection

microdata evidence on rent sharing we examine the effect of firm profits on wages for individual workers while focusing on the empirical complications associated with estimating the extent of rent sharing controlling for worker and firm fixed effects and using several instruments to deal with the endogeneity of profits we report results indicating that ordinary least square ols estimates strongly underestimate the effects of profits on wages moreover the effect of profits on wages are estimated separately for firms with increasing and decreasing profits within a given time period we find a positive and stable effect only in firms with increasing profits this is in line with the idea that falling profits do not lead to wage cuts while increasing profits imply higher wages

uncertainty and the trade off between scale and flexibility in investment abstract this paper analyzes the behavior of a firm that chooses both the scale and timing of its investment sensitivity analysis shows that greater demand volatility is associated with the firm investing in larger increments less frequently this is in contrast to the conventional wisdom which is that greater volatility leads to investment in smaller increments more frequently overall the reduced frequency dominates the greater scale so that the long run average rate of investment is a decreasing function of demand volatility the timing and scale of investment are most sensitive to volatility when there are substantial investment economies of scale

branching scale economies and banking costs abstract in this paper we develop and estimate a model of bank costs based on a theory of the branch cost function first we show that convenient branch location is important to banking customers and implies that banks do not necessarily operate branches at minimum average cost this theoretical result provides a rationale for including branch variables in the bank cost function second we estimate a statistical cost equation derived explicitly from assumptions about the branch cost function and including branch output variables our empirical results suggest substantial economies of scale at the branch level but no economies from expansion by branching finally we show that the resulting cost structure of the banking industry does not imply that a highly concentrated banking structure is necessary for efficiency thus economies of scale would not be expected to force small banks out of the market even if current restrictions on interstate banking are liberalized

an empirical study of joint production and scale economies in commercial banking this paper utilizes the translog cost function to test the proposition that the bank productionfunction is characterized by jointness the cross section analysis for the years 1973 through 1978 indicates that bank production is in fact characterized by jointness this result calls into question the findings and implications of studies that utilize the assumption of non jointness in production since virtually all of the major bank cost studies employ the assumption of nonjointness the second part of our analysis examines scale economies for the banking firm while allowing for jointness in production our estimates indicate that scale economies characterize bank production at only small bank sizes and that the cost structure of large banks is characterized by diseconomies of scale

zeros and lumps in investment empirical evidence on irreversibilities and nonconvexities the objective of this paper is to investigate if and how capital adjustment departs from the smooth pattern implied by standard model based on convex adjustment costs using norwegian micro data we start by documenting the intermittent and lumpy nature of investment rates we then present two pieces of econometric evidence on these issues first we estimate a discrete hazard model to determine the probability of having an episode of high investment conditional on the length of the interval from the last high investment episode second we estimate a switching regression model that allows for the response of the investment rate to fundamentals to differ across regimes in both cases we investigate the aggregate implications of our results

current account adjustment in developing countries the role of exchange rate regimes i introduction an important question in open economy macroeconomics is whether exchange rate rigidity hinders current account adjustment also known as the friedman hypothesis according to friedman 1953 a flexible exchange rate regime facilitates current account adjustment while a fixed exchange rate regime delays the adjustment process this hypothesis has stimulated extensive research on the relationship between exchange rate regimes and current account reversals e g adalat and eichengreen 2007 de haan schokker and tcherneva 2008 milesi feretti and razin 2000 pancaro and rueffer 2009 while existing studies have made significant contributions to the literature they largely focus on the determinants of current account reversals rather than the duration of current account deficit spells emphasized in the friedman hypothesis does a country s exchange rate regime really matter to how long it stays in a high current account deficit state and if so to what extent does the fixed exchange rate regime delay the adjustment process this article addresses the above important questions by empirically evaluating the role of exchange rate regimes on the duration of high current account deficit spells in developing countries given the prevalence of large and persistent current account deficits across countries over the last few decades understanding the impact of exchange rate regimes on the duration of high deficit spells is particularly important and pertinent specifically we identify high current account deficit spells and employ hazard models to examine whether a fixed exchange rate regime increases the duration of high deficit spells and thus delays current account adjustment 1 a novelty of this approach is that by estimating hazard models we can explicitly test for the effect of exchange rate regimes on the duration of high current account deficit spells which is more in the spirit of the friedman hypothesis on the basis of a large dataset with annual observations for 95 developing countries over the period 1971 2004 we find strong evidence that in developing countries fixed exchange rate regimes are associated with longer duration of high deficit spells and hence significant delays in the adjustment to high current account deficits this finding is robust to alternative exchange rate regime classifications and different model specifications furthermore we show that fixed exchange rate regimes delay current account adjustment only in the hard peg case but not in the soft peg case from a policy perspective this suggests that only the corner solution of a very rigid exchange rate regime delays the current account adjustment but not if the regime allows for some flexibility in the exchange rate adjustment our findings thus lend strong support to the friedman hypothesis the remainder of the article proceeds as follows after a brief review of the relevant literature in section ii section iii provides a description of our dataset and defines high deficit spells in section iv we discuss the methodological issues involved in the duration analysis the empirical results are presented in section v and section vi concludes ii the literature on exchange rate regimes and current account adjustment the discussion on the relationship between exchange rate regimes and current account adjustment goes back to friedman s seminal work in the 1950s friedman 1953 argues that nominal exchange rate flexibility expedites current account adjustment while nominal exchange rate rigidity delays the adjustment under a flexible exchange rate system where the exchange rate is allowed to vary freely a rising current account deficit would induce the depreciation of domestic currency which in turn leads to an increase in exports a decrease in imports and a rapid convergence to a balanced current account in the case of fixed exchange rate regimes where exchange rates are not allowed to vary countries have to rely solely on internal price adjustment mechanisms to produce corrective movements in their current accounts

machine replacement and the business cycle lumps and bumps this paper explores investment fluctuations due to discrete changes in a plant s capital stock the resulting aggregate investment dynamics are surprisingly rich reflecting the interaction between a replacement cycle the cross sectional distribution of the age of the capital stock and an aggregate shock using plant level data lumpy investment is procyclical and more likely for older capital further the predicted path of aggregate investment that neglects vintage effects tracks actual aggregate investment reasonably well however ignoring fluctuations in the cross sectional distribution of investment vintages can yield predictable nontrivial errors in forecasting changes in aggregate investment

irreversible investments and volatile markets a study of the chemical processing industry this paper investigates the empirical effect of volatility on irreversible investments we use a sample of chemical products in the united states and the european union to test the impact of volatility on new investments in capacity we distinguish among three sources of volatility exchange rates input prices and product demand we find that the effects of volatility on the amount of capacity investment differ depending on the source of volatility input prices and product demand volatility do not appear to have a material and statistically significant effect in either the united states or the european union in contrast exchange rate volatility has a significant negative impact on investment by chemical manufacturers in the european union

returns to scale and input substitution for large u s banks the united states commercial banking industry has experienced significant changes in recent years the recent wave of mergers and the near term prospects of interstate banking suggests that the industry is moving toward much larger average banking organizations rhoades 1985 will a more concentrated banking industry result in lower costs due to scale economies we address this question by examining the cost function for large banks numerous studies of economies of scale in banking exist generally tracing their roots to the classic papers by benston 1965 and bell and murphy 1968 a good review of the most recent studies can be found in clark 1988 the majority of the papers uses samples of smaller banks that is under 1 billion in deposits finding generally that economies of scale are quickly exhausted and that further increases in bank size occur at constant or possibly increasing cost the extrapolation of previous findings for samples of smaller banks to large banks may be problematic especially in the current environment first large banks service a different mix of markets and customers than small banks suggesting that large and small banks probably face different cost structures second the process of deregulation may have rendered the results of prior studies moot since the data pertain to periods before significant deregulation since we

geology or economics testing models of irreversible investment using north sea oil data this paper tests the main implications of models of irreversible investment using data from operations in the oil fields in the north sea discrete time hazard regression models are used to ascertain the influence of economic variables the expected price of oil the variance of the price of oil and the level of reserves on the lag between the discovery of a field and the decision to develop the field we are able to control for heterogeneity in the data by incorporating variables which account for both the geological features of each field and individual operator characteristics the results indicate that the expected price of oil and the level of reserves are important in influencing the appraisal duration but that the variance of the oil price is not variables capturing the non economic features of the individual fields are also found to be significant factors affecting the appraisal lag copyright 1994 by royal economic society

a duration model of irreversible oil investment theory and empirical evidence the aim of this paper is to analyse the implications of the theory of irreversible investment under uncertainty for investment in oil fields on the united kingdom continental shelf ukcs we consider the problem of an operator who owns a licence to develop and extract oil from a field of known capacity an intertemporal optimization model in discrete time is developed to derive decision rules for the timing of the irreversible development investment and for the optimal rate of extraction model simulation is then used to describe the properties of the numerical solutions the predictions of the theory on the determinants of the irreversible investment decision are then examined using statistical duration analysis data on the length of the time period between discovery and development are available for individual fields on the ukcs we measure the duration of the irreversible investment gestation lag for each field and test the model by assessing the significance of the theoretical variables in explaining the significance of such a lag both our theoretical model and our empirical results suggest the importance of a nonlinear interaction of the level of oil prices and the volatility of oil prices in determining the development lag the simulation of our theoretical model shows a nonlinear impact of oil price volatility on the trigger level of oil prices our empirical results suggest that the effect of price volatility is a function of the expected price level with increased price volatility having a positive impact on the duration of investment appraisal when expected prices are low and a negative impact when they are high

branch bank operating costs evidence from savings banks in finland empirical findings on branch bank operating costs are presented the analyses examine 1988 data for 646 individual branch offices representing 43 savings banks in finland another sample of 48 unit banks with no branches is collected comparisons of plant scale economics are made using the more traditional approach based on aggregate branch bank data versus individual branch office data moreover effects of the number of branches in the branching organization on individual branch office operating costs are examined finally direct comparisons of branch office versus unit bank operating costs are provided

investment spikes and uncertainty in the petroleum refining industry this paper investigates the effect of uncertainty on the investment decisions of petroleum refineries in the us we construct uncertainty measures from commodity futures market and use data on actual capacity changes to measure investment episodes capacity changes in us refineries occur infrequently and a small number of investment spikes account for a large fraction of the change in industry capacity given the lumpy nature of investment adjustment in this industry we empirically model the investment process using hazard models an increase in uncertainty decreases the probability a refinery adjusts its capacity the results are robust to various investment thresholds our findings lend support to theories that emphasize the role of irreversibility in investment decisions

what do we know about investment under uncertainty recent theoretical developments relating to investment under uncertainty have highlighted the importance of irreversibility for the timing of investment expenditures and their expected returns this has subsequently stimulated a growing empirical literature which examines uncertainty and threshold effects on investment behaviour this paper presents a review of this literature a variety of methods have been used to investigate the empirical implication of irreversibility in investment the majority focusing on the relationship between investment flows and proxy measures of uncertainty a general conclusion is that increased uncertainty at both aggregate and disaggregate levels leads to lower investment rates this suggests that there is an irreversibility effect under which greater uncertainty raises the value of the call option to delay a commitment to investment this effect appears to dominate any positive impact on investment arising from the fact that greater uncertability under certain circumstances increases the marginal profitability of capital the methods used raise a number of issues which call into question the reliability of the findings and these are addressed in the paper however if such irreversibility effects are present then their omission from traditional investment models casts doubt on the efficacy of such specifications jel classification d81 d92 e22

economies of scale and scope in thrift institutions the case of finnish cooperative and savings banks accounting data on operating costs and outputs for cooperative and savings banks in 1983 and 1984 are used to provide empirical evidence on the cost structure of thrift institutions in finland a modified translog cost model is fitted to the data economies of scale and scope are estimated based on the coefficients of the cost model using advances and bills as outputs the results indicate that cost curves for both cooperative banks and savings banks generally tend to be l shaped at the plant level and u shaped at the firm level scope diseconomies are found in the joint production of advances and bills this evidenceindicates that natural monopoly conditions are not present in the finnish thrift industry