investor valuation of the abandonment option abstract we investigate whether investors price the option to abandon a firm at its exit value theory prices this real option as an american put with both a stochastic strike price exit value and a stochastic value of the underlying security the value of cash flows the empirical implications are that firm value increases in exit value after controlling for expected going concern cash flows and that more generalizable assets produce more abandonment option value using discounted earnings forecasts to proxy for expected cash flows and prior literature to categorize asset generalizability we find strong support for the predictions of abandonment option theory

changes in the value relevance of earnings and book values over the past forty years this paper investigates systematic changes in the value relevance of earnings and book values over time we report three primary findings first contrary to claims in the professional literature the combined value relevance of earnings and book values has not declined over the past forty years and in fact appears to have increased slightly second while the incremental value relevance of bottom line earnings has declined it has been replaced by increasing value relevance of book values finally much of the shift in value relevance fiom earnings to book values can be explained by the increasing frequency and magnitude of one time items the increasing frequency of negative earnings and changes in average firm size and intangible intensity across time

imitation contagion or exertion using a tax reform to reveal how colleagues sick leaves influence worker behaviour we analyse the social interaction effects in sick leave behaviour in the workplace using high quality norwegian matched employer employee data with detailed individual information on sick leaves during the 2004 2006 period we find that social interaction effects in sick leave behaviour in the workplace do exist and that the effects are noticeable in size the strong relationship between the sick leave rates among colleagues is not solely the result of contagious diseases nor is it caused by improved informational quality or by the increased workload for the non absent workers evidence supports the existence of reciprocal worker behaviour that is unrelated to joint leisure seeking activities

valuing flexibility as a complex option this paper develops an approach for valuing flexible production systems using contingent claims pricing demand curves for our model s underlying assets output products may be downward sloping in contrast with the standard option pricing assumption also our marginal production exercise costs may be increasing in addition we allow for multiple products and a production capacity constraint these elements of the model result in complex exercise decisions for the contingent claims which comprise the production system s value we illustrate our approach by valuing a flexible system that produces two products which have profit margin functions with stochastic parameters

the effects of policy uncertainty on investment evidence from the unexpected acceptance of a far reaching referendum in switzerland abstract does increased economic policy uncertainty dampen investment of firms we provide direct evidence on this question by examining the effects of an unexpectedly accepted and far reaching referendum in switzerland in february 2014 the outcome put several economically relevant agreements between switzerland and its main trading partner the european union at stake using firm level panel data covering the 2009 2015 period and data from two special surveys levied shortly after the vote we examine how the induced policy uncertainty affected investment of swiss firms our difference in differences in differences estimations and complementary survey results give strong evidence that the uncertainty caused by the vote dampened as theoretically expected investment of exposed firms with irreversible investment by as much as one quarter in the two years following the vote exposed firms that can reverse investment appear rather to increase investment in the year after the vote our survey evidence suggests that these firms engage in investment to streamline their production

options on the minimum or the maximum of two risky assets analysis and applications this paper provides analytical formulas for european put and call options on the minimum or the maximum of two risky assets the properties of these formulas are discussed in detail options on the minimum or the maximum of two risky assets are useful to price a wide variety of contingent claims of interest to financial economists applications discussed in this paper include the valuation of foreign currency debt option bonds compensation plans risk sharing contracts secured debt and growth opportunities involving mutually exclusive investments

the information content of losses abstract this study hypothesizes that because shareholders have a liquidation option losses are not expected to perpetuate they are thus less informative than profits about the firm s future prospects the results are consistent with the hypothesis they also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses the liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests

real flexibility and financial structure an empirical analysis i examine the empirical relation between real flexibility and financial structure i test whether real flexibility increases debt capacity by lowering default risk and making assets more marketable or decreases debt capacity by facilitating risk shifting and asset substitution i measure real flexibility as the sensitivity of marginal production and investment decisions to variations in the economic environment i find that financial leverage is negatively related to production flexibility but positively related to investment flexibility this split in results suggests that although asset substitution facilitated by investment flexibility can be prevented contractually risk shifting facilitated by production flexibility is intractable copyright 2003 oxford university press

cross border banking credit access and the financial crisis abstract we study the sensitivity of credit supply to bank financial conditions in 16 emerging european countries before and during the financial crisis we use survey data on 10 701 applicant and non applicant firms that enable us to disentangle effects driven by positive and negative shocks to the banking system from demand shocks that may vary across lenders we find strong evidence that firms access to credit was affected by changes in the financial conditions of their banks during the crisis firms were more credit constrained if they were dealing with banks that experienced a decline in equity and tier 1 capital as well as losses on financial assets we also find that access to credit reflects the balance sheet conditions of foreign parent banks the effect of positive and negative shocks to a bank is greater for riskier firms and firms with fewer tangible assets

the articulation of price earnings ratios and market to book ratios and the evaluation of growth this paper interprets the price earnings ratio pie and the marketto book ratio pib and describes how they articulate it also describes the role of book rate of return on equity the ratio of their denominators in the determination of the ratios and the relation between them although both are reported regularly there is not a common understanding of these issues for example the pie ratio has been interpreted as an earnings growth indicator cragg and malkiel 1982 and litzenberger and rao 1971 a risk measure ball 1978 and an earnings capitalization rate graham dodd and cottle 1962 boatsman and baskin 1981 and alford 1992 derivations based on the gordon 1962 model describe it as determined by return on equity beaver and morse 1978 show that this ratio indicates transitory earnings the molodovsky effect from molodovsky 1953 it has also been interpreted as an indicator of mispriced stocks basu 1977 and jaffee keim and westerfield 1989 and as a product of accounting principles craig johnson and joy 1987 the p b ratio received less academic attention until fama and french 1992 traditionally it was interpreted as indicating expected return on equity see for example graham dodd and cottle 1962 this interpretation is given expression in the standard formula reconciling price to book value in preinreich 1938 edwards and bell 1961 and peasnell 1982 for example like pie p b has been modeled as a growth

distress risk premia in expected stock and bond returns abstract prior studies find that shareholders strategic actions over debtholders are significant for stock prices but not for bond prices i find that for firms with private and public debt strategic default has no significant effect on distress risk premia in expected stock or bond returns suggesting that the dispersion of bondholders greatly weakens the shareholder advantage effect the shareholder advantage effect on stock prices is only significant for firms with only private debt and to some degree affected by the dispersion of stockholders and complexity in capital structure overall renegotiation friction helps explain the cross sectional implications of strategic default for stock and bond prices

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

investment dynamics and earnings return properties a structural approach we propose the standard neoclassical model of investment under uncertainty with short run adjustment frictions as a benchmark for earnings return patterns absent accounting influences we show that our proposed benchmark generates a wide range of earnings return patterns documented in accounting research notably our model generates a concave earnings return relation similar to that of basu 1997 and predicts that the earnings return concavity increases with the volatility of firms underlying shock processes and decreases with the level of firms investments we find strong empirical support for these predictions overall our evidence suggests that our proposed benchmark is useful for understanding the joint dynamics of variables of interest to accounting research e g earnings returns investment market to book absent accounting influences a necessary precondition for inferring the effects of accounting from these dynamics

acquisition premiums when investment banks invest their own money in the deals they advise and when they do not evidence from acquisitions of assets in the uk abstract this paper shows that investment banks that advise acquirers of assets negotiate favourable terms when they invest their own money in the deal but lead their clients to overpay when they do not have financial incentives acquirers pay the smallest premiums in divisional mbos when advised by the investment bank that finances the deal and the largest premiums in interfirm asset sales when advised by an investment bank remunerated contingent on deal completion premiums are in between the two extremes when acquirers do not use advisors these results are attributed to investment bank incentives which exacerbate the information asymmetry between buyers and sellers of assets

options on the maximum or the minimum of several assets using an intuitive approach that also provides new intuition concerning the black and scholes equation this paper extends the results of johnson and stulz to the pricing of options on the minimum or the maximum of several risky assets

asymmetric timely loss recognition adverse shocks to external capital and underinvestment evidence from the collapse of the junk bond market abstract using the collapse of the junk bond market in the early 1990s as an exogenous shock to external capital i document in both difference in differences and triple difference designs that speculative grade firms that recognize economic losses in a timely manner experience a smaller reduction in investment following the collapse the effect is more pronounced for speculative grade firms with a low level of asset liquidation value using the excess bond premium as a proxy for fluctuations in the supply of capital i also extend the generalizability of my findings to a broader sample of 84 421 firm years over the 1972 2011 period

conflicts of interest and market illiquidity in bankruptcy auctions theory and tests i develop and estimate a model of cash auction bankruptcy using data on 205 swedish firms the results challenge arguments that cash auctions as compared to reorganizations are immune to conflicts of interest between claimholders but lead to inefficient liquidations i show that a sale of the assets back to incumbent management is a common bankruptcy outcome sale backs are more likely when they favor the bank at the expense of other creditors on the other hand inefficient liquidations are frequently avoided through sale backs when markets are illiquid that is when industry indebtedness is high and the firm has few nonspecific assets the problem of designing an efficient bankruptcy law has received considerable attention in the last decade much of the debate has centered around the optimality of two different stylized bankruptcy procedures cash auctions such as the u s chapter 7 code and structured bargaining represented by the u s chapter 11 reorganization code recently several european countries including france germany and great britain have changed their bankruptcy regulation by introducing reorganization procedures similar to chapter 11 at the same time the chapter 11 code has been criticized by academics including baird 1986 emphasizing that the bargaining procedure frequently results in long and wasteful negotiations these critics argue that chapter 11 should instead be replaced with a mandatory auction procedure other researchers such as aghion hart and moore 1992 and shleifer and vishny 1992 have pointed out that a cash auction is likely to suffer from considerable inefficiencies arising from transaction costs and market illiquidity the nature and costs of the chapter 11 procedure are

deconstructing a mortgage meltdown a methodology for decomposing underwriting quality technical progress in originating and pricing mortgages has enabled a trend since 1979 toward more relaxed credit standards on mortgage lending which is reflected in rising foreclosure rates we develop a methodology for decomposing the trend in mortgage performance in the national serviced portfolio into a part due to economic conditions and a part due to underwriting changes the decomposition provides natural metrics or indices of underwriting quality and economic conditions the results suggest that the recent mortgage debacle can be attributed about equally to each factor the relaxation in observable credit standards is not monotonic while the easing of important risk characteristics like loan to value ratios in the early 1990s was arguably deliberate the negative effects of lower standards was masked by strong local and national economic conditions after 2000 there was little change in observable loan characteristics nevertheless loan performance continued to erode even after controlling for the economic environment we present evidence that the erosion in the latter period must have arisen from underwriting covariates that are typically unobservable to investors in securitizations this evidence is consistent with the hypothesis that moral hazard in non agency securitizations of mortgages particularly subprime and alt a loans caused underwriting risks to be mispriced

time to build option value and investment decisions abstract investment decisions and outlays are often made sequentially for example the rate at which construction proceeds is usually flexible and can be adjusted with the arrival of new information traditional discounted cash flow methods which treat the pattern of investment as fixed ignore this flexibility and understate the value of the project this paper uses contingent claims analysis to derive optimal decision rules and to value such investments we determine the effects of time to build opportunity cost and uncertainty on the investment decision for reasonable parameter values we show how a simple npv rule can lead to gross errors

why are losses less persistent than profits curtailments vs conservatism it is well documented that losses are less persistent than profits and that stock prices anticipate the lower persistence of losses yet the underlying explanation for these results is unclear one explanation lies in the abandonment option whereby firms with losses are more likely to curtail operations e g hayn hayn c 1995 the information content of losses j accounting econom 20 2 125 153 another explanation involves timely loss recognition stemming from conservative accounting e g basu basu s 1997 the conservatism principle and the asymmetric timeliness of earnings j accounting econom 24 1 3 37 we provide direct evidence that curtailments are an important factor contributing to the lower persistence of losses an implication of our results is that popular measures of conservatism such as the measure proposed by basu also reflect curtailments this paper was accepted by suraj srinivasan accounting