real options agency conflicts and optimal capital structure abstract we examine the impact of a stockholder bondholder conflict over the timing of the exercise of an investment option on firm value and corporate financial policy we find that an equity maximizing firm exercises the option too early relative to a value maximizing strategy and we show how this problem can be characterized as one of overinvestment in risky investment projects equityholders incentive to overinvest significantly decreases firm value and optimal leverage and significantly increases the credit spread of risky debt numerical solutions illustrate how the agency cost of overinvestment and its effect on corporate financial policy vary with firm and project characteristics

oil prices and the stock prices of alternative energy companies energy security issues coupled with increased concern over the natural environment are driving factors behind oil price movements while it is widely accepted that rising oil prices are good for the financial performance of alternative energy companies there has been relatively little statistical work done to measure just how sensitive the financial performance of alternative energy companies are to changes in oil prices in this paper a four variable vector autoregression model is developed and estimated in order to investigate the empirical relationship between alternative energy stock prices technology stock prices oil prices and interest rates our results show technology stock prices and oil prices each individually granger cause the stock prices of alternative energy companies simulation results show that a shock to technology stock prices has a larger impact on alternative energy stock prices than does a shock to oil prices these results should be of use to investors managers and policy makers

recruitment based competition between industries a community ecology because entrepreneurs often must recruit labor in order to launch their ventures the labor market is a potential source of constraint in the entrepreneurial process moreover competition in the labor market likely does not end at the boundaries of the product market as industries overlap in their needs for labor i use an organizational ecology framework to examine how founding rates in an industry vary with the degree of competition with other industries for labor and thereby provides evidence of recruitment based competition between industries in a community ecology the extent of recruitment based overlap between industries is inferred from data on flows of employees within and between industries analyses of founding rates in eighty four industries in denmark over the period 1980 1991 suggest that new firms are less likely to appear in industries that occupy crowded regions of the labor market copyright 2004 oxford university press

leveraged investments and agency conflicts when cash flows are mean reverting we analyse the effect of mean reverting cash flows on the costs of shareholder bondholder conflicts arising from partially debt financed investments in a partial equilibrium setting we find that such agency costs are significantly lower under mean reverting mr dynamics when compared to the ubiquitous geometric brownian motion gbm the difference is attributed to the stationarity of the mr process in addition through the application of a novel agency cost decomposition we show that for a larger speed of mean reversion agency costs are driven mainly by suboptimal timing decisions as opposed to suboptimal financing decisions in contrast under the standard gbm assumption the agency costs are driven mainly by suboptimal financing decisions for large growth rates and by suboptimal timing decisions for smaller or negative growth rates

the response of worker effort to piece rates we measure the elasticity of worker effort with respect to changes in the piece rate using panel data collected from the payroll records of a british columbia tree planting firm our data contain information on daily worker productivity and the piece rate received over a five month period using a structural model to control for the endogeneity of the piece rate we estimate this elasticity to be approximately 2 14 we also calculate a nonstructural lower bound to this elasticity equal to 0 77 structural estimation also allows us to perform policy experiments and to compare firm profits under alternative compensation systems our results suggest that profits would increase by at least 17 percent were the firm to implement the optimal static contract as predicted by principal agent theory this increase in profits would be due to capturing worker rents after the revelation of private information over ability yet only a negligible proportion of these rents could be captured while inducing workers to reveal ability truthfully suggesting that dynamic considerations were important in determining the firm s actual choice of contract

the lognormal diffusion is hardly an equilibrium price process for exhaustible resources abstract in a model of a competitive spot market for an exhaustible resource under demand uncertainty it is shown that the lognormal diffusion the geometrical brownian motion can hardly be an equilibrium price process under the reasonable assumptions that suppliers choose the time to extract and deposits have different costs each supplier will start extraction when price first exceeds a boundary which depends on that supplier s costs but no new extraction will start during periods when the price is lower than the previously recorded high it is highly unlikely that aggregate demand responds to prices in the same way as supply

valuing flexibility the case of an integrated gasification combined cycle power plant abstract in this paper we analyze the choice between two technologies for producing electricity in particular the firm has to decide whether and when to invest either in a natural gas combined cycle ngcc power plant or in an integrated gasification combined cycle igcc power plant which may burn either coal or natural gas instead of assuming that fuel prices follow standard geometric brownian motions here they are assumed to show mean reversion specifically to follow an inhomogeneous geometric brownian motion first we consider the opportunity to invest in a ngcc power plant we derive the optimal investment rule as a function of natural gas price and the remaining life of the right to invest in addition the analytical solution for a perpetual option to invest is obtained then we turn to the igcc power plant we analyse the valuation of an operating plant when there are switching costs between modes of operation and the choice of the best operation mode this serves as an input to evaluate the option to invest in this plant finally we derive the value of an opportunity to invest either in a ngcc or igcc power plant i e to choose between an inflexible and a flexible technology respectively depending on the opportunity s time to maturity we derive the pairs of coal and gas prices for which it is optimal to invest in ngcc in igcc or simply not to invest numerical computations involve the use of one and two dimensional binomial lattices that support a mean reverting process for coal and gas prices basic parameter values are taken from an actual igcc power plant currently in operation sensitivity of some results with respect to the underlying stochastic process for fuel price is also checked

a model of capital structure when earnings are mean reverting a multiperiod model of optimal capital structure is developed under the assumption that earnings follow an autoregressive process firm value and leverage vary through time and at each date the firm achieves an optimal debt level that is a function of the full state contingent debt policy the reversion parameter of the earnings series is shown to be positively related to various measures of variability and negatively related to leverage if earnings processes are not homogeneous across firms then standard earnings risk measures in capital structure studies do not adequately represent crosssectional differences in variability in firm value

leverage decision and manager compensation with choice of effort and volatility abstract we study the incentive effects of granting levered or unlevered stock to a risk averse manager the stock is granted by risk neutral shareholders who choose leverage and compensation level the manager applies costly effort and selects the level of volatility both of which affect expected return the results are driven by the attempt of the risk neutral shareholders to maximize the value of their claims net of the compensation package we consider a dynamic setting and find that levered stock is optimal for high type managers firms with high momentum large firms and firms for which additional volatility only implies a modest increase in expected return

commodity betas with mean reverting output prices abstract this paper provides a theoretical derivation of commodity beta stock price sensitivity to commodity price using a contingent claim model the model incorporates operating leverage financial leverage costly financial distress and mean reverting commodity prices and highlights the important role played by the speed of reversion of the commodity price it is used to identify theoretically the main determinants of commodity beta commodity beta is predicted to be an increasing function of the operating and financial leverage of the firm and a decreasing function of the company s tax rate and the level volatility and speed of reversion of the commodity price empirical tests with a sample of gold mining firms provide support for these predictions particularly the new implications of the model the effect of the commodity price s speed of reversion and the company s tax rate

how big is the debt overhang problem abstract i re examine the debt overhang problem where the flexible investment level rather than the irreversible decision whether or not to operate is used to measure the underinvestment caused by debt financing i measure a large overhang cost with long term debt or short term debt as is standard underinvestment with long term debt is more severe when investment opportunities are poor and is mitigated as opportunities improve in contrast underinvestment with short term debt remains significant even when investment opportunities are good firms lever up as opportunities improve to take advantage of tax shields so that equity claimants still face the incentive to underinvest

long and short term efficiency in an automobile factory an econometric case study abstract this paper models the production technology of an automobile assembly plant as an integrated long and short term relationship between inputs labor and capital and output number of monthly assembled units the parameters of the production function elasticity of output to labor and capital and the growth rate in total factor productivity tfp are estimated using the error correction mechanism ecr the paper compares the tfp and the inverse of the hours per vehicle hpv the standard measure of productivity used in the industry as indicators of operating efficiency of a production unit the empirical application also highlights the potentialities of the ecm in insider and case study econometrics research especially when the observed output and inputs of a production process deviate from the production technological frontier due to anticipated and unanticipated perturbations in the operations

piece rates fixed wages and incentives evidence from a field experiment data from a field experiment are used to estimate the gain in productivity that is realized when workers are paid piece rates rather than fixed wages the experiment was conducted within a tree planting firm and provides daily observations on individual worker productivity under both compensation systems unrestricted statistical methods estimate the productivity gain to be 20 since planting conditions potentially affect incentives structural econometric methods are used to generalize the experimental results to out of sample conditions the structural results suggest that the average productivity gain outside of the experimental conditions would be at least 21 7

the ecology of organizational demography managerial tenure distributions and organizational competition this paper argues that turnover processes in top management teams create inter organizational interdependencies i argue that managerial capabilities are shaped by their experiences in a given competitive context differences in managerial tenure therefore lead to differences in managerial capabilities a comparison of the tenure distribution of a top management team with those of its competitors therefore captures the extent to which a firm relies on managerial capabilities similar to those of its competitors overlap in managerial capabilities will lead to greater competition for resources since managers shape a firm s pattern of resource utilization i hypothesize that organizational growth rates will decline to the extent that competitors are crowded around a firm s location in the tenure distribution analyses of growth in viewership among commercial television stations support this claim copyright 1999 by oxford university press

the incentive effects of tournaments revisited evidence from the european pga tour this analysis of data from the 1987 european men s professional golf association pga tour strongly supports the hypothesis that the level and structure of prizes in pga tournaments influence players performance specifically players performance appears to vary positively with both the total money prizes awarded in a tournament and the marginal return to effort in the final round of play a value that varies among players largely depending on how the prize money is allocated among finishers of different ranks the authors suggest that these results together with the similar results of their earlier study of the 1984 u s men s pga tour may have implications for the design of compensation systems for certain groups of workers such as corporate executives college professors and salespeople

an estimate of a sectoral model of labor mobility this paper develops a model of sectoral labor mobility and tests its main implications the model nests two distinct hypotheses on the origin of mobility a sectoral shocks and b worker employer mismatch we estimate the relative importance of each hypothesis and find that the bulk of labor mobility is caused by mismatch rather than by sectoral shift we then try to put a value on society s match specific information that is we ask to what extent the availability of the option to change jobs raises gnp we find that the mobility option raises expected earnings by roughly between 8 5 percent and 13 percent of labor earnings which translates to an increase in gnp of between 6 percent and 9 percent

the effect of mean reversion on investment under uncertainty abstract mean reverting processes are appropriate for most real option investment models yet geometric brownian motion gbm processes are generally used for tractability hassett and metcalf j econom dyn control 19 1995 1471 1488 argue that using a gbm process is justified because mean reversion has two opposing effects it brings the investment trigger closer and also reduces the conditional volatility thereby lowering the likelihood of reaching the trigger and the overall effect on investment should be negligible for most reasonable parameter values this paper extends the hassett and metcalf model by incorporating a third factor the effect of mean reversion on systematic risk the main result is that mean reversion in general does have a significant impact on investment moreover this effect could be either positive or negative depending on various factors such as project duration cost of investing interest rate etc thus it is generally inappropriate to use the gbm process to approximate a mean reverting process

firm spin offs in denmark 1981 2000 patterns of entry and exit abstract this paper adds large sample evidence on the extent to which the likelihood of business failure or success is related to relationships between parent firms and their off spring for this purpose we make use of an exhaustive matched employer employee data set covering the entire danish private sector in years 1981 to 2000 to study firm entry and exit special focus is on spin offs a particular group of small entrants which are founded by groups of persons originating from the same former workplace we estimate a multinomial logit model in order to examine which characteristics of the founders and the parent firms increase the probability of spinning off next we carry out a duration analysis of the subsequent transitions of the spin offs and compare their exit risks with those of other entrant firms which have less strong parent progeny relationships in terms of worker flows

piece rates fixed wages and incentive effects statistical evidence from payroll records we develop and estimate an agency model of worker behavior under piece rates and fixed wages the model implies optimal decision rules for the firm s choice of a compensation system as a function of working conditions our model also implies an upper and lower bound to the incentive effect the productivity gain realized by paying workers piece rates rather than fixed wages that can be estimated using regression methods using daily productivity data collected from the payroll records of a british columbia tree planting firm we estimate these bounds to be an 8 8 and a 60 4 percent increase in productivity structural estimation which accounts for the firm s optimal choice of a compensation system suggests that incentives caused a 22 6 percent increase in productivity however only part of this increase represents valuable output because workers respond to incentives in part by reducing quality

option valuation of claims on real assets the case of offshore petroleum leases this paper extends financial option theory by developing a methodology for the valuation of claims on a real asset an offshore petroleum lease several theoretical and practical problems not present in applying option pricing theory to financial assets are addressed most importantly we show the necessity of combining option pricing techniques with a model of equilibrium in the market for the underlying asset petroleum reserves the advantages of this approach over conventional discounted cash flow techniques are emphasized the methodological development provides important insights for both company behavior and government policy promising empirical results are reported

the trade off model with mean reverting earnings theory and empirical tests the trade off theory of capital structure predicts a positive relationship between earnings and leverage contradictory to well established empirical evidence since corporate earnings are known to be mean reverting we reformulate the trade off model with mean reverting earnings we show that with mean reverting earnings there should be a negative relationship between optimal leverage and the current earnings level the model also illustrates the importance of the earnings reversion parameter in the determination of capital structure the major implications of the model are supported by empirical tests carried out with a sample of firms in the s p 500 index

toward an integrated approach to industry dynamics and labor mobility industrial dynamics and labour mobility are two fields of economic research that have developed fast in recent years but along what are essentially separate lines this paper shows that the processes those two fields deal with can be highly interdependent and demonstrates the usefulness of and the opportunity for an integrated approach to the dynamics of industries and labour mobility it concludes with a list of questions that inform a research agenda dedicated to such approach

the road taken origins and evolution of employment systems in emerging companies excerpt drawing on a unique archive of qualitative and quantitative data describing 100 bay area high technology firms within their first decade this paper examines the models of employment relations espoused by company founders and bow those models shaped the evolution of human resource management within their organizations information gleaned from interviews suggests that founders and others involved in designing and launching these companies had blueprints for the employment relation that varied along three key dimensions the primary basis of employee attachment and motivation the primary means for controlling and coordinating work and the primary criterion emphasized in selection based on combinations of these three dimensions firms in our sample cluster fall into one of four distinct types which we label the star factory engineering and commitment models multivariate statistical analyses document how the founder s employment model shaped the subsequent adoption and timing of various human resource policies and documents over these companies early histories as well as the speed with which the first full time human resource manager was appointed the findings are strongly suggestive of complementarities and a tendency toward internal consistency among dimensions of human resource management and of strong path dependence in the evolution of employment systems in organizations some implications of these findings for transactions cost perspectives on the employment relationship are discussed

mean reversion in equilibrium asset prices evidence from the futures term structure we use the term structure of futures prices to test whether investors anticipate mean reversion in spot asset prices the empirical results indicate mean reversion in each market we examine for agricultural commodities and crude oil the magnitude of the estimated mean reversion is large for example point estimates indicate that 44 percent of a typical spot oil price shock is expected to be reversed over the subsequent eight months for metals the degree of mean reversion is substantially less but still statistically significant we detect only weak evidence of mean reversion in financial asset prices in this study we provide evidence of mean reversion in the prices of several real and financial assets rather than examining evidence of ex post reversion using time series of asset prices we use price data from futures contracts with varying delivery horizons to test whether investors expect asset prices to revert this approach offers two advantages first since futures prices are readily available for many markets our procedure can be implemented for many assets including those for which reliable spot price data is elusive second there is little ambiguity as to the source of any mean reversion detected using our method subject only to the maintained assumption that the no arbitrage cost of carry condition holds our test detects mean reversion that is expected to occur in equilibrium but has no power to detect mean reversion resulting from noise or inefficiencies our methodology focuses on relations between price levels and the slope of the futures term structure defined as the change across delivery dates in the futures prices observed on a given trading date an inverse relation between prices and the futures term slope constitutes evidence that investors expect mean reversion in spot prices to illustrate initially assume there are no

employing identities in organizational ecology this paper argues for greater attention to employment based organizational identities in ecological theory and research i define and explore three dimensions of particular relevance to labor market identities sharpness resonance focus and authenticity the paper offers some speculations regarding i when labor market identities are most decisive for organizations ii how product market and labor market identities interact iii how employment based organizational identities might be operationalized and iv how greater attention to such identities would illuminate key issues in organizational ecology copyright 2004 oxford university press

the life cycle of a competitive industry firm numbers first rise then later fall as an industry evolves this nonmonotonicity is explained using a competitive model in which innovation opportunities fuel entry and relative failure to innovate prompts exit equilibrium time paths for price and quantity also share features of the data the model is estimated using data from the u s automobile tire industry a particularly dramatic example of the nonmonotonicity in firm numbers

human resource management policies and productivity new evidence from an econometric case study first we distinguish various approaches used by economists to assess the impact of human resource management practices on productivity and then we briefly review and illustrate studies that represent different approaches in the main part of the paper we illustrate the econometric case study method by using new data to analyse a case from retail trade and by emulating an approach used in an earlier study consistent with theory we find that when employees have opportunities to participate to receive appropriate information and pertinent rewards a one standard deviation increase of the first principal component score would increase productivity by 1 our findings imply that there are benefits to innovative work practices even in settings where employees do simple tasks and employees are relatively low skilled since our findings are similar to those contained in a previous study our results also indicate the value of replication studies

the productivity effects of employee stock ownership plans and bonuses evidence from japanese panel data the authors report the first results for japanese firms on the effects of employee stock ownership plans esops and bonuses by estimating production functions using new panel data they find that the introduction of an esop will lead to a 4 5 percent increase in productivity this productivity payoff takes three to four years there is a modest productivity gain from the bonus system the authors also find evidence that the productivity effect of bonuses is enhanced by the existence of esops suggesting that esops may create a climate conducive to profit sharing by enhancing long term commitment and peer monitoring copyright 1995 by american economic association

general properties of option prices when the underlying price process is a one dimensional diffusion as well as in certain restricted stochastic volatility settings a contingent claim s delta is bounded by the infimum and supremum of its delta at maturity further if the claim s payoff is convex concave the claim s price is a convex concave function of the underlying asset s value however when volatility is less specialized or when the underlying process is discontinuous or non markovian a call s price can be a decreasing concave function of the underlying price over some range increasing with the passage of time and decreasing in the level of interest rates much of the financial options literature derives precise option prices when the underlying asset price process is completely specified since it is empirically difficult to ascertain what the true underlying process is another part of that literature is concerned with deriving general properties of option prices when the underlying price process is not fully specified but instead is assumed to belong to some general class of stochastic processes merton 1973 cox and ross 1976 jagannathan 1984 in particular in the absence of arbitrage opportunities and assuming that the risk neutralized stock price follows a proportional stochastic process a risk neutral return distribution independent of price merton 1973 and jagannathan 1984 show that a call option s price is an increasing convex function of the stock price cox and ross 1976

book rate of return and prediction of earnings changes an empirical investigation over the years there has developed a fairly substantial body of research on the time series of earnings as a whole this literature concludes that changes in annual accounting earnings are unpredictable that is earnings follow a random walk 1 based on this result some inferences of economic substance policy have been claimed 2 in this paper we reconsider empirical issues which at least to some extent have been obscured by this conclusion we argue that the above result is only true in a limited sense since a modest enlargement of the predictive information set should allow for a rejection of the hypothesis that earnings changes are

a real options approach to the valuation of a forestry investment abstract the theory of real options is used to model the optimal tree harvesting decision the value of the option to harvest is estimated using a dynamic programming approach and a general numerical solution technique suitable for any type of stochastic process for prices the conditions under which the optimal harvest time is independent of price are examined in addition the impact of assuming future lumber prices are mean reverting is considered it is found that option value and optimal cutting time are significantly different under the mean reversion assumption compared to geometric brownian motion

improving productivity opening the black box hourly productivity levels in the uk still remain behind those in some competitor countries the government devotes much policy attention to enhancing productivity and continues to emphasise its five drivers investment innovation skills enterprise and competition this article argues that it is investment broadly defined that is the key to sustained productivity improvement the emphasis should be on improving productivity simultaneously with improving the quality of production only thus will the gains be widely shared in achieving these aims there are two prerequisites for policy makers the first is to ensure better coordination of policy than appears to be currently achieved by the present departmental structures in whitehall the second is to recognize fully the long and complex chain of causation that can be triggered by pulling on one policy lever such complexity can only be fully understood by more research on what actually goes on inside the black box of the organization 2006 oxford university press