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Net Present Value (net + present_value)
Kinds of Net Present Value Selected AbstractsThe Prospects for Foreign Debt Sustainability in Post-Completion-Point Countries: Implications of the HIPC-MDRI FrameworkDEVELOPMENT POLICY REVIEW, Issue 2 2008Jacinta Nwachukwu The Enhanced HIPC Initiative was launched in 1999 to reduce the Net Present Value (NPV) of foreign debt of the world's poorest countries to a sustainable threshold of 150% of their exports. This article applies a simple growth-with-debt model to 16 post-completion-point HIPCs to assess whether this goal will be met by 2015. Its somewhat optimistic base-case projections suggest that participation in the current Enhanced HIPC-MDRI initiative will only reduce the NPV of their total external debt to 176% of exports by this date. Sensitivity tests which expose these countries to adverse exogenous shocks help draw attention to policies that could ensure that they do not again accumulate unsustainable debt levels. [source] The Return on Investment of the Guggenheim Museum BilbaoINTERNATIONAL JOURNAL OF URBAN AND REGIONAL RESEARCH, Issue 2 2006BEATRIZ PLAZA The city of Bilbao has made use of a museum as one of the multiple means to restructure its former industrial base. However, the effectiveness of this costly formula is not always clear. Three major issues have arisen: the effects of Guggenheim Museum Bilbao on Bilbao's image, the effects on overnight stays, and the effects on the local economy. There is little debate about the first issue, and room for more evidence on the second and third issues. The aim is to quantify the museum's impact on tourism and employment and to calculate its yield (Return on Investment and Net Present Value). The approach adopted is the quantitative analysis of statistical data to try to isolate the economic contribution of the Guggenheim. [source] Capital investment appraisal: a new risk premium modelINTERNATIONAL TRANSACTIONS IN OPERATIONAL RESEARCH, Issue 2 2003Rose Baker Net Present Value (NPV) is the principal valuation model of the financial literature. Firms are accordingly directed, as a matter of good practice, to adopt the model for selecting investment projects, yet questionnaire surveys show that the adoption rate has been very slow and the quality of usage questionable. In particular, alternative risk measures are popular amongst practitioners. In this paper we remodel the treatment of risk in the NPV model based on assumptions that seem realistic in an organizational or operational, as opposed to a personal, investment context. We derive formulas for calculating: the appropriate discount rate, a ,risk horizon' (where the risk premium exceeds the expected value), and a maximum default hazard point for projects. These measures provide a rationale for non-NPV approaches to risk measurement in questionnaire responses and offer a practical benefit to investors. [source] A decision support tool for irrigation infrastructure investments,IRRIGATION AND DRAINAGE, Issue 4 2010Shahbaz Khan outil d'aide à la décision; gestion de l'eau; investissements saisonniers et à long terme; optimisation; simulation; analyse coûts-avantages; ensemble de l'exploitation; négociation de l'eau; économie d'eau Abstract Increasing water scarcity, climate change and pressure to provide water for environmental flows urge irrigators to be more efficient. In Australia, ongoing water reforms and most recently the National Water Security Plan offer incentives to irrigators to adjust their farming practices by adopting water-saving irrigation infrastructures to match soil, crop and climatic conditions. WaterWorks is a decision support tool to facilitate irrigators to make long- and short-term irrigation infrastructure investment decisions at the farm level. It helps irrigators to improve the economic efficiency, water use efficiency and environmental performance of their farm businesses. WaterWorks has been tested, validated and accepted by the irrigation community and researchers in NSW, Australia. The interface of WaterWorks is user-friendly and flexible. The simulation and optimisation module in WaterWorks provides an opportunity to evaluate infrastructure investment decisions to suit their seasonal or long-term water availability. The sensitivity analysis allows substantiation of the impact of major variables. Net present value, internal rate of return, benefit,cost ratio and payback period are used to analyse the costs and benefits of modern irrigation technology. Application of WaterWorks using a whole farm-level case study indicates its effectiveness in making long- and short-term investment decisions. WaterWorks can be easily integrated into commercial software such as spreadsheets, GIS, real-time data acquisition and control systems to further enhance its usability. WaterWorks can also be used in regional development planning. Copyright © 2009 John Wiley & Sons, Ltd. L'augmentation de la rareté de l'eau, le changement climatique et la pression pour fournir de l'eau pour l'environnement incitent les irrigants à être plus efficaces. En Australie les réformes en cours sur l'eau, et plus récemment le Plan National de Sécurité de l'Eau, incitent les irrigants à ajuster leurs pratiques agricoles par l'adoption d'infrastructures d'irrigation économisant l'eau pour s'adapter aux conditions de sols, de cultures et de climat. WaterWorks est un outil d'aide à la décision pour faciliter les décisions d'investissement à long terme et court terme au niveau de l'exploitation. Il aide les irrigants à améliorer l'efficacité économique, l'efficacité de l'utilisation de l'eau et la performance environnementale de leurs exploitations agricoles. Le WaterWorks a été testé, validé et accepté par la communauté de l'irrigation dans le New South Wales, Australie. L'interface de WaterWorks est convivial et flexible. Le module de simulation et d'optimisation dans WaterWorks permet d'évaluer les décisions d'investissement en fonction de la disponibilité en eau saisonnière ou à long terme. L'analyse de sensibilité permet d'étayer l'impact des principales variables. La valeur actuelle nette, le taux de rendement interne, le ratio coûts-avantages et la période de récupération sont utilisés pour analyser les coûts et les avantages des technologies modernes d'irrigation. L'application de WaterWorks à une étude de cas complète au niveau de l'exploitation montre son efficacité pour les décisions d'investissement à long terme et court terme. Le WaterWorks peut être facilement intégré dans des logiciels commerciaux tels que les tableurs, les SIG, des systèmes d'acquisition de données en temps réel et de contrôle afin d'améliorer sa convivialité. Le WaterWorks peut également être utilisé pour la planification du développement régional. Copyright © 2009 John Wiley & Sons, Ltd. [source] Impact of research investment on Cassava production technologies in India,AUSTRALIAN JOURNAL OF AGRICULTURAL & RESOURCE ECONOMICS, Issue 3 2009Tavva Srinivas The present study was an ex-post assessment done to validate past funding on cassava research, based on economic surplus approach. Though cassava was introduced as a food crop in Kerala, India from Brazil, it has changed its status to commercial crop at present in Tamil Nadu and Andhra Pradesh states. This was made possible due to intensive research and development efforts of different R&D organizations. Cassava technologies developed enabled in sustaining the crop in the country with the world's highest productivity. All the cassava production technologies considered in the study resulted in an economic surplus of Rs.3585.87 million in the target domain covering Kerala, Tamil Nadu and Andhra Pradesh. Consumers and producers benefited to the tune of Rs.2090.64 million and Rs.1495.23 million respectively. Net present value of economic gains was estimated to be Rs.3548.76 million. Present value of research investment on cassava production technologies was Rs.37.11 million resulting in benefit cost ratio of 96.63:1 with a high internal rate of return of 104 per cent. Thus the study indicated that the research investments incurred on cassava production technologies development was highly economical and provided evidence to the policy makers that supporting the research investment on underground, under exploited tropical root crops like cassava is an economically viable proposition. [source] An Ecological and Economic Assessment of the Nontimber Forest Product Gaharu Wood in Gunung Palung National Park, West Kalimantan, IndonesiaCONSERVATION BIOLOGY, Issue 6 2001Gary D. Paoli We studied the demographic effect and economic returns of harvesting aromatic gaharu wood from fungus-infected trees of Aquilaria malaccensis Lam. at Gunung Palung National Park, Indonesia, to evaluate the management potential of gaharu wood. Aquilaria malaccensis trees openface> 20 cm in diameter occurred at low preharvest densities (0.16,0.32 ha) but were distributed across five of six forest types surveyed. During a recent harvest, 75% of trees were felled, with harvest intensities ranging from 50% to 100% among forest types. Overall, 50% of trees contained gaharu wood, but trees at higher elevations contained gaharu wood more frequently ( 73%) than trees at lower elevation (27%). The mean density of regeneration ( juveniles> 15 cm in height) near adult trees (3,7 m away) was 0.2/m2, 200 times greater than at random in the forest (10/ha), but long-term data on growth and survivorship are needed to determine whether regeneration is sufficient for population recovery. Gaharu wood extraction from Gunung Palung was very profitable for collectors, generating an estimated gross financial return per day of US $8.80, triple the mean village wage. Yet, the estimated sustainable harvest of gaharu wood at natural tree densities generates a mean net present value of only $10.83/ha, much lower than that of commercial timber harvesting, the dominant forest use in Kalimantan. Returns per unit area could be improved substantially, however, by implementing known silvicultural methods to increase tree densities, increase the proportion of trees that produce gaharu wood, and shorten the time interval between successive harvests. The economic potential of gaharu wood is unusual among nontimber forest products and justifies experimental trials to develop small-scale cultivation methods. Resumen: Datos ecológicos y económicos son esenciales para la identificación de productos forestales no maderables tropicales con potencial para la extracción sostenible y rentable en un sistema bajo manejo. Estudiamos el efecto demográfico y los beneficios económicos de la cosecha de la madera aromática gaharu de árboles de Aquilaria malaccenis Lam infectados por hongos en el Parque Nacional Gunung Palung Indonesia para evaluar el potencial de manejo de la madera. Arboles de Aquilaria malaccenis> 20 cm de diámetro ocurrieron en bajas densidades precosecha (0.16,0.32 ha,1) pero se distribuyeron en cinco de los seis tipos de bosque muestreados. Durante una cosecha reciente, 75% de los árboles fueron cortados, con intensidades de cosecha entre 50 y 100% en los tipos de bosque. En conjunto, 50% de los árboles contenían madera gaharu, pero árboles de elevaciones mayores contenían madera gaharu más frecuentemente ( 73%) que árboles de elevaciones menores (27%). La densidad promedio de regeneración ( juveniles> 15 cm de altura) cerca de árboles adultos (de 3 a 7 m de distancia) fue de 0.2 m,2, 200 veces mayor que en el bosque (10 ha,1), pero se requieren datos a largo plazo sobre el crecimiento y la supervivencia para determinar si la regeneración es suficiente para la recuperación de la población. La extracción de madera gaharu de Gunung Palung fue muy redituable, generando un rendimiento financiero bruto estimado en US $8.80 diarios, el triple del salario promedio en la zona. Sin embargo, la cosecha sostenible estimada de madera gaharu en densidades naturales de árboles genera un valor presente neto de sólo $10.83 ha,1, mucho menor que el de la cosecha comercial de madera, uso dominante del bosque en Kalimantan. Sin embargo, los rendimientos por unidad de área podrían mejorar sustancialmente mediante la instrumentación de métodos silviculturales para incrementar la densidad de árboles, incrementar la proporción de árboles que producen madera gaharu y reducir el intervalo de tiempo entre cosechas sucesivas. El potencial económico de la madera gaharu es poco usual entre los productos forestales no maderables y justifica la experimentación para desarrollar métodos de cultivo en pequeña escala. [source] Modeling Goodwill for Banks: A Residual Income Approach with Empirical Tests,CONTEMPORARY ACCOUNTING RESEARCH, Issue 1 2006Joy Begley Abstract This paper uses the residual income valuation technique outlined in Feltham and Ohlson 1996 to examine the relation between stock valuations and accounting numbers for a prototypical banking firm. Prior work of this nature typically assumes a manufacturing setting. This paper contributes to the prior research by clarifying how the approach can be extended to settings where value is created from financial assets and liabilities. Key elements of our model include allowing banks to generate positive net present value from either lending or borrowing activities, and allowing for accounting policy to affect valuation through the loan loss allowance. We validate our model using archival data analysis, and interpret coefficients in light of our modeling assumptions. These results suggest that banks create value more from deposit-taking activities than from lending activities. Vuong tests confirm that our model outperforms adaptations of the unbiased accounting model of Ohlson 1995 and adaptations of the base model proposed by Beaver, Eger, Ryan, and Wolfson 1989. However, our model is outperformed by the popular net income-book value model used in many empirical studies, and we can formally reject one of our key modeling assumptions. These tests of our model suggest future avenues for improving upon the theoretical analysis. [source] Benefit,Cost Appraisals of Export Processing Zones: A Survey of the LiteratureDEVELOPMENT POLICY REVIEW, Issue 1 2003Kankesu Jayanthakumaran This article surveys research on the performance of Export Processing Zones (EPZs) using a benefit,cost analytical framework. Results suggest that zones in South Korea, Malaysia, Sri Lanka, China and Indonesia are economically efficient and generate returns well above estimated opportunity costs. On the other hand, the heavy infrastructure costs involved in setting up the zone in the Philippines resulted in a negative net present value. The zones have been an important source of employment in all cases and have promoted local entrepreneurs in some. However, as industrial development proceeds, the gap between the market and opportunity costs of labour narrows and the interest in EPZs tends to disappear. It may hold only if the zones generate private profit to domestic shareholders. [source] Stochastic Cost Optimization of Multistrategy DNAPL Site RemediationGROUND WATER MONITORING & REMEDIATION, Issue 3 2010Jack Parker This paper investigates numerical optimization of dense nonaqueous phase liquid (DNAPL) site remediation design considering effects of prediction and measurement uncertainty. Results are presented for a hypothetical problem involving remediation using thermal source reduction (TSR) and bioremediation with electron donor (ED) injection. Pump-and-treat is utilized as a backup measure if compliance criteria are not met. Remediation system design variables are optimized to minimize expected net present value (ENPV) cost. Adaptive criteria are assumed for real-time control of TSR and ED duration. Source zone dissolved concentration data enabled more reliable and lower cost operation of TSR than soil concentration data, but using both soil and dissolved data improved results sufficiently to more than offset the additional cost. Decisions to terminate remediation and monitoring or to initiate pump-and-treat are complicated by measurement noise. Simultaneous optimization of monitoring frequency, averaging period, and lookback periods to confirm decisions, in addition to remediation design variables, reduced ENPV cost. Results indicate that remediation design under conditions of uncertainty is affected by subtle interactions and tradeoffs between design variables, compliance rules, site characteristics, and uncertainty in model predictions and monitoring data. Optimized designs yielded cost savings of up to approximately 50% compared with a nonoptimized design based on common engineering practices. Significant improvements in accuracy and reductions in cost were achieved by recalibrating the model to data collected during remediation and re-optimizing design variables. Repeating this process periodically is advisable to minimize total costs and maximize reliability. [source] Real Options: Meeting the Georgetown ChallangeJOURNAL OF APPLIED CORPORATE FINANCE, Issue 2 2005Thomas E. Copeland In response to the demand for a single, generally accepted real options methodology, this article proposes a four-step process leading to a practical solution to most applications of real option analysis. The first step is familiar: calculate the standard net present value of the project assuming no managerial flexibility, which results in a value estimate (and a "branch" of a decision tree) for each year of the project's life. The second step estimates the volatility of the value of the project and produces a value tree designed to capture the main sources of uncertainty. Note that the authors focus on the uncertainty about overall project value, which is driven by uncertainty in revenue growth, operating margins, operating leverage, input costs, and technology. The key point here is that, in contrast to many real options approaches, none of these variables taken alone is assumed to be a reliable surrogate for the uncertainty of the project itself. For example, in assessing the option value of a proven oil reserve, the relevant measure of volatility is the volatility not of oil prices, but of the value of the operating entity,that is, the project value without leverage. The third step attempts to capture managerial flexibility using a decision "tree" that illustrates the decisions to be made, their possible outcomes, and their corresponding probabilities. The article illustrate various kinds of applications, including a phased investment in a chemical plant (which is treated as a compound option) and an investment in a peak-load power plant (a switching option with changing variance, which precludes the use of constant risk-neutral probabilities as in standard decision tree analysis). The fourth and final step uses a "no-arbitrage" approach to form a replicating portfolio with the same payouts as the real option. For most corporate investment projects, it is impossible to locate a "twin security" that trades in the market. In the absence of such a security, the conventional NPV of a project (again, without flexibility) is the best candidate for a perfectly correlated underlying asset because it represents management's best estimate of value based on the expected cash flows of the project. [source] CREATING VALUE IN THE OIL INDUSTRYJOURNAL OF APPLIED CORPORATE FINANCE, Issue 1 2004Nick Antill In contrast with current thinking that conglomerates are inefficient, this article begins by presenting arguments in favor of the size and structure of the large integrated oil companies, also known as "the supermajors." Among the advantages are tax efficiency, information flow, political and technological know-how, broad supplier and customer relationships, scale economies, cross-business economies of scope, brand power, and the ability to coordinate strategic initiatives across businesses. These advantages all translate into a lower cost of capital. One problem, however, is that this lower cost of capital does not seem to be reflected in the target returns on capital currently set by the supermajors. Observing that the financial goal of a corporation is to maximize not its return on capital but rather the net present value of expected future cash flows and earnings, the authors argue that the majors need to make two major changes to current practice. First, their investment hurdle rates should be reduced from their current level of 14,15% to the weighted average cost of capital, which is estimated to run about 8,9%. Second, the actual returns on capital reported in published accounts are largely meaningless; and when evaluating new investments and existing operations alike, the companies must find an annual performance measure that better reflects the economic realities of the business. This paper recommends use of a performance measurement framework based on economic profit that should serve two critical purposes: it will encourage managers to undertake all value-increasing projects (not just those that will maintain or increase reported return on capital), and it will help the companies communicate their strategy and results to the investment community. [source] OPTIMIZATION CRITERIA FOR BATCH RETORT BATTERY DESIGN AND OPERATION IN FOOD CANNING-PLANTSJOURNAL OF FOOD PROCESS ENGINEERING, Issue 6 2003R. SIMPSON ABSTRACT Optimization of thermal processing in the commercial sterilization of canned foods is of great interest because the canning industry plays an important role within the economy of the food processing sector. Many food canning plants operate in a batch mode with a battery of individual batch retorts. The aim of this study was to propose and analyze several criteria and methodologies for optimum design and operation of such retort systems. Two criteria were proposed in the case of choosing the optimum number of retorts to be installed when designing a new batch-operated canning line. The third criterion dealt with seeking optimum process conditions for maximizing output from a fixed number of retorts when processing small batches of different products and container sizes. In the case of new plant design optimization, one objective was to determine the optimum number of retorts that would minimize on-going processing costs related to labor and energy. Retort scheduling (programming) was studied from which a simple mathematical expression was derived for this purpose. A second objective was to determine the optimum number of retorts that would maximize the net present value of initial investment. Approaches based upon engineering economics were studied from which to develop a mathematical procedure for this purpose. In the case of maximizing output from a fixed number of retorts for different products and container sizes, isolethal processes were identified for various product/containers from which a common set of process conditions could be chosen for simultaneous processing of different product lots in the same retort. [source] Optimal design and planning of sustainable chemical supply chains under uncertaintyAICHE JOURNAL, Issue 1 2009Gonzalo Guillén-Gosálbez Abstract This article addresses the design of sustainable chemical supply chains in the presence of uncertainty in the life cycle inventory associated with the network operation. The design task is mathematically formulated as a bi-criterion stochastic mixed-integer nonlinear program (MINLP) that simultaneously accounts for the maximization of the net present value and the minimization of the environmental impact for a given probability level. The environmental performance is measured through the Eco-indicator 99, which incorporates the recent advances made in Life Cycle Assessment. The stochastic model is converted into its deterministic equivalent by reformulating the probabilistic constraint required to calculate the environmental impact in the space of uncertain parameters. The resulting deterministic bi-criterion MINLP problem is further reformulated as a parametric MINLP, which is solved by decomposing it into two sub-problems and iterating between them. The capabilities of the proposed model and solution procedure are illustrated through two case studies for which the set of Pareto optimal, or efficient solutions that trade-off environmental impact and profit, are calculated. These solutions provide valuable insights into the design problem and are intended to guide the decision maker towards the adoption of more sustainable design alternatives. © 2008 American Institute of Chemical Engineers AIChE J, 2009 [source] Pricing Double-Trigger Reinsurance Contracts: Financial Versus Actuarial ApproachJOURNAL OF RISK AND INSURANCE, Issue 4 2002Helmut Gründl This article discusses various approaches to pricing double-trigger reinsurance contracts,a new type of contract that has emerged in the area of ,,alternative risk transfer.'' The potential coverage from this type of contract depends on both underwriting and financial risk. We determine the reinsurer's reservation price if it wants to retain the firm's same safety level after signing the contract, in which case the contract typically must be backed by large amounts of equity capital (if equity capital is the risk management measure to be taken). We contrast the financial insurance pricing models with an actuarial pricing model that has as its objective no lessening of the reinsurance company's expected profits and no worsening of its safety level. We show that actuarial pricing can lead the reinsurer into a trap that results in the failure to close reinsurance contracts that would have a positive net present value because typical actuarial pricing dictates the type of risk management measure that must be taken, namely, the insertion of additional capital. Additionally, this type of pricing structure forces the reinsurance buyer to provide this safety capital as a debtholder. Finally, we discuss conditions leading to a market for double-trigger reinsurance contracts. [source] Modelling selective breeding in protandrous, batch-reared Asian sea bass (Lates calcarifer, Bloch) using walkback selectionAQUACULTURE RESEARCH, Issue 10 2010Nicholas Andrew Robinson Abstract A bioeconomic simulation model for Lates calcarifer predicted that a strategy involving crossing current generation males with previous generation females would be a practical, effective and profitable way of dealing with protandry when batch rearing for selective breeding to improve the growth rate. The strategy allowed earlier initialization and more frequent ongoing rounds of selection, and resulted in a 16,19% higher overall response, than an alternative where each generation's males were crossed with the same generation's females. The strategy also yielded the highest short-term benefit,cost ratio (13:1 versus 7:1 after 8 years of selective breeding) and the highest short- and long-term value for participants in a breeding cooperative (a net present value of AU$28 million and an internal rate of return of 144% over 10 years), due to higher yields per fixed costs of production per unit area and due to savings in feed costs per kilogram of production. Breeding facilities of scale producing 50 full-sibling families per generation were found to be more profitable than those producing 100 families. [source] An empirical assessment of the value of irrigation water: the case study of Murrumbidgee catchment,AUSTRALIAN JOURNAL OF AGRICULTURAL & RESOURCE ECONOMICS, Issue 1 2010Muhammad Ejaz Qureshi Evaluation of value of irrigation water is essential for supporting policy decision making relating to investments in the irrigation sector, efficient allocation of irrigation water and water pricing and for crafting policies to compare the variable impacts of water reform within and across sectors of the economy. This paper asks the question of how much an established irrigator would pay for water and at what price farmers planning to expand the area they have under irrigation would consider paying for the right to access water. An analytical framework is developed to estimate the net present value of both annual and perennial agricultural activities in the Murrumbidgee catchment. Using these estimates the total value of water used in Murrumbidgee catchment is estimated. An aggregate water supply curve is derived for the catchment from where water may be acquired from irrigators for environmental flows. [source] Estimating Observation Unit Profitability with Options ModelingACADEMIC EMERGENCY MEDICINE, Issue 5 2008Christopher W. Baugh MD Abstract Background:, Over the past two decades, the use of observation units to treat such common conditions as chest pain, asthma, and others has greatly increased. These units allow patients to be directed out of emergency department (ED) acute care beds while potentially avoiding inpatient admission. Many studies have demonstrated the clinical effectiveness of care delivered in such a setting compared to the ED or inpatient ward. However, there are limited data published about observation unit finance. Methods:, Using the economic principles of stock options, opportunity costs, and net present value (NPV), a model that captures the value generated by admitting a patient to an observation unit was derived. In addition, an appendix is included showing how this model can be used to calculate the dollar value of an observation unit admission. Results:, A model is presented that captures more complexity of observation finance than the simple difference between payments and costs. The calculated estimate in the Appendix suggests that the average value of a single observation unit admission was about $2,908, which is about 40% higher than expected. Conclusion:, Subtraction of costs from payments may significantly underestimate the financial value of an observation unit admission. However, the positive value generated by an observation unit bed must be considered in the context of other projects available to hospital administrators. [source] The Economics of Landmine Clearance in AfghanistanDISASTERS, Issue 1 2002Geoff Harris This paper presents an economic evaluation of landmine clearance in Afghanistan. The main benefits comprise increased agricultural output, saved transport time and running costs, saved human casualties and the saved costs of supporting refugees and displaced persons. An investment of US$100 million between 1988 and 1998 is estimated to provide annual benefits of $50.3 million per annum between 1999 and 2008. This translates into net present values of between $935 and $1,744 million, depending on the rate of discount used. This contrasts with the negative NPVs estimated for several other countries. [source] Investor Reaction to Inter-corporate Business Contracting: Evidence and ExplanationECONOMIC NOTES, Issue 3 2006Fayez A. Elayan We examine the stock market reaction to 1227 inter-corporate ordinary business contract announcements reported by Dow Jones between January 1, 1990 and December 31, 2001. Around contract announcement dates, we find statistically significant positive average abnormal returns and abnormal trading volume for contractors, but insignificant positive abnormal returns and negative abnormal volume for contractees. Cross-sectionally, contract announcement period returns are higher for contractors who are small relative to the contract size, have higher return volatility, larger market-to-book ratios and higher profitability. The announcement period returns of contract-awarding firms are not significant and are only marginally related to cross-sectional explanatory factors. The results are consistent with two explanatory stories: contractor quasi-rents induced by the winner's curse and information signalling about contractor production costs. The results are not consistent with perfect competition, with contracts having positive net present values for both parties, and with a version of incomplete contracting theory. [source] FREE CASH FLOW AND PUBLIC GOVERNANCE: THE CASE OF ALASKAJOURNAL OF APPLIED CORPORATE FINANCE, Issue 3 2000Dwight R. Lee In a widely cited 1986 article in the American Economic Review, Michael Jensen gave the concept of free cash flow (FCF) a new twist by redefining it as cash flow in excess of that required to fund all projects with positive net present values. Put another way, FCF represents funds available in the firm that managers may choose to hold as idle cash, return to shareholders, or invest in projects with returns below the firm's cost of capital. In redefining FCF in this way, Jensen converted FCF from a measure of economic income and value into a measure of corporate assets available for discretionary, and potentially value-destroying, use by firm managers. And, as he argued in his important article, managers in mature businesses with substantial free cash flow have a tendency to destroy value by plowing too much capital back into those businesses or, often worse, making ill-advised acquisitions in unrelated businesses. Several methods have been developed in financial markets and internal corporate governance systems to discourage managers from wasting FCF. Better monitoring by boards of directors, large ownership blocks, and properly aligned management compensation contracts are all parts of the solution. And the extraordinary increase in stock repurchases in recent years, invariably applauded by investors, is another illustration of the market's success in encouraging companies to address their free cash flow problems. But if the "FCF problem" of the private sector has attracted considerable attention from finance scholars, the problem is even more acute in the public sector, where FCF can be thought of as tax revenue in excess of what is required to finance well-defined and generally accepted levels of public services. Unlike the private sector, in the public sector there are neither measures nor mechanisms by which to monitor and constrain wasteful spending by elected officials. In this article, the authors attempt to measure the costs to taxpayers of government FCF using the case of Alaska, which since 1969 has received a huge windfall of tax revenue from North Slope oil leases. After examining the state's public finances from 1968 through 1993, the authors offer $25 billion as a conservative estimate of the social losses from Alaska's waste of free cash flow during that 25-year period. [source] | ||||||||||||||||||||||