Costo de Capital en Segmentos Industriales: Una Estimación Robusta

Generally, financial economics recommends using the Sharpe-Lintner capital asset pricing model to arrive at a methodology for determining the cost of capital on an investment project. This cost of capital depends crucially on the project's systematic risk

INFRISK : a computer simulation approach to risk management in infrastructure project finance transactions

Few issues in modern finance have inspired the interest of both practitioners and theoreticians more than risk evaluation and management. The basic principle governing risk management in an infrastructure project finance deal is intuitive and well-articulated: allocate project-specific risks to parties best able to bear them (taking into account each party's appetite for, and aversion to, risk); control performance risk through incentives; and use market hedging instruments (derivatives) for covering marketwide risks arising from fluctuations in, for instance, interest and exchange rates, among other things. In practice, however, governments have been asked to provide guarantees for various kinds of projects, often at no charge, because of problems associated with market imperfections: a) Derivative markets (swaps, forwards) for currency and interest-rate risk hedging either do not exist or are inadequately developed in most developing countries. b) Limited contracting possibilities (because of problems with credibility of enforcement). c) Differing methods for risk measurement and evaluation. Two factors distinguish the financing of infrastructure projects from corporate and traditional limited-recourse project finance: 1) a high concentration of project risk early in the project life cycle (pre-completion), and 2) a risk profile that changes as the project comes to fruition, with a relatively stable cash flow subject to market and regulatory risk once the project is completed. The authors introduce INFRISK, a computer-based risk-management approach to infrastructure project transactions that involve the private sector. Developed in-house in the Economic Development Institute of the World Bank, INFRISK is a guide to practitioners in the field and a training tool for raising awareness and improving expertise in the application of modern risk management techniques. INFRISK can analyze a project's exposure to a variety of market, credit, and performance risks form the perspective of key contracting parties (project promoter, creditor, and government). Their model is driven by the concept of the project's economic viability. Drawing on recent developments in the literature on project evaluation under uncertainty, INFRISK generates probability distributions for key decision variables, such as a project's net present value, internal rate of return, or capacity to service its debt on time during the life of the project. Computationally, INFRISK works in conjunction with Microsoft Excel and supports both the construction and the operation phases of a capital investment project. For a particular risk variable of interest (such as the revenue stream, operations and maintenance costs, and construction costs, among others) the program first generates a stream of probability of distributions for each year of a project's life through a Monte Carlo simulation technique. One of the key contributions made by INFRISK is to enable the use of a broader set of probability distributions (uniform, normal, beta, and lognormal) in conducting Monte Carlo simulations rather than relying only on the commonly used normal distribution. A user's guide provides instruction on the use of the package.Banks&Banking Reform,Economic Theory&Research,Environmental Economics&Policies,Payment Systems&Infrastructure,Public Sector Economics&Finance,Financial Intermediation,Banks&Banking Reform,Environmental Economics&Policies,Economic Theory&Research,Public Sector Economics&Finance

Searching for the Profit in Pollution Prevention: Case Studies in the Corporate Evaluation of Environmental Opportunities

The concept of pollution prevention, or "P2," signifies a new, proactive environmental mindset that targets the causes, rather than the consequences, of polluting activity. While anecdotal evidence suggests that P2 opportunities exist and that many have been pursued, there is also the perception that the pace of P2 is far too slow. To explore that claim—and to shed light on barriers to P2 innovation—this paper presents case studies of industrial P2 projects that were in some way unsuccessful. While based on a very limited sample, the evidence contradicts the view that firms suffer from organizational weaknesses that make them unable to appreciate the financial benefits of P2 investments. Instead, the projects foundered because of significant unresolved technical difficulties, marketing challenges, and regulatory barriers. Based on evidence from the cases, the paper concludes with a discussion of environmental policy reforms likely to promote P2 innovation..

On strategic default and liquidity risk

How does the uncertain provision of external finance affect investment projects' default probability and liquidity risk? In this paper, I study the strategic interaction between many creditors and a single borrower in the context of a two-period investment project requiring external credit. Loans mature in one period but the project requires two periods to complete. The key working assumptions are that creditors are risk-averse and that any uncertainty is common knowledge: information about the fundamentals can be incomplete but not asymmetric. Mixed and perfect Bayesian strategies are used to compute the equilibrium probabilities of default and early liquidation. The impact of the maturity structure on default and liquidity risk is a function of the underlying structural and stochastic parameters and investors' beliefs about the state of fundamentals. The implications for banking regulation are assessed under fixed and variable loan rates. An open range of fundamentals is derived outside of which default and liquidity risk are either zero or one. The cyclical properties of default and liquidity risk are shown to depend sensitively on the relative cost of early liquidation to the borrower and the creditors, hence also on the regulatory policy stance

Too Big to Fool: Moral Hazard, Bailouts, and Corporate Responsibility

Domestic and international regulatory efforts to prevent another financial crisis have been converging on the idea of trying to end the problem of “too big to fail”—that systemically important financial firms take excessive risks because they profit from success and are (or at least, expect to be) bailed out by government money to avoid failure. The legal solutions being advanced to control this morally hazardous behavior tend, however, to be inefficient, ineffective, or even dangerous—such as breaking up firms and limiting their size, which can reduce economies of scale and scope; or restricting central bank authority to bail out failing firms, which (ironically) exacerbates the risk that an uncontrolled banking failure will trigger another crisis. This article contends that the too-big-to-fail problem is exaggerated. It shows that the evidence for this problem is weak, conflating correlation and causation. It also shows that managerial incentives should mitigate the problem because managers who cause their firms to engage in excessive risk-taking, in the expectation of a government bailout, are taking serious personal risks. That begs the question why systemically important firms sometimes do take excessive risks. The article argues that such risk-taking is more likely to be caused by other factors, including a legally embedded conflict between corporate governance and the public interest that allows managers of those firms to ignore the costs of systemic externalities. To address this, the law should—and the article shows that it realistically could—control excessive risk-taking more directly by requiring managers to account for systemic externalities in their governance decisions. It also argues for the creation of a privatized fund to minimize the public cost of bailing out systemically important firms that might fail (because of exogenous shocks, for example) notwithstanding reduced risk-taking

Entrepreneurial Overconfidence, Self-Financing and Capital Market Efficiency

We study the impact of entrepreneurial optimism on self-nancing and capital market efficiency in a setting where entrepreneurs are better informed about the quality of their projects than investors. Projects have either low- or high-quality. Entrepreneurs use self-finance to signal the perceived quality of their projects. Investors observe self-financing decisions and know the fractions of high-quality projects, realistic and optimistic entrepreneurs. We show that entrepreneurial optimism improves capital market efficiency when the returns of high-quality projects have a high variance, entrepreneurs' have high absolute risk aversion, and the gap between the mean returns of high- and low-quality projects is small.signaling; overconfidence; market efficiency; self-finance

Is economic analysis of projects still useful?

The author argues for a shift in the focus of economic analysis of projects. First, project analysts need to make full use of project information, especially identifying the source of the divergence between market prices and economic costs as well as the source of the divergence between economic and private flows, and the group that pays the cost or enjoys the benefits. This information identifies gainers, and losers, likely project supporters and detractors, and fiscal impact. Second, project analysts need to look at the project from the perspective of the main stakeholders, principally the implementing agency, the government, and the country. Third, they should also assess whether all of the main actors have the economic and financial incentives to implement the project as designed. Fourth, they should take advantage of advancesin technology and attempt to identify and measure any external effects of projects, as well as the benefits of education and health projects. Finally, they should take advantage of the advances in personal computing to provide a more systematic assessment of risk.Economic Theory&Research,Decentralization,Public Health Promotion,Environmental Economics&Policies,Health Economics&Finance,Economic Theory&Research,Health Economics&Finance,Banks&Banking Reform,Health Monitoring&Evaluation,Environmental Economics&Policies

How does Investors' Legal Protection affect Productivity and Growth?

This paper analyzes the implications of investors' legal protection on aggregate productivity and growth. We have two main results. First, that better investors' legal protection can mitigate agency problems between investors and innovators and therefore expand the range of high-tech projects that can be financed by non-bank investors. Second, investors' legal protection shifts investment resources from less productive (medium-tech) to highly productive (high-tech) projects and therefore enhances economic growth. These results stem from two forces. On one hand, private investors' moral hazard problems (in which entrepreneurs shift investors' resources to their own benefit), and on the other hand innovators' risk of project termination by banks due to wrong signals about projects' probability of success. Our results are consistent with recent empirical studies that show a high correlation between legal investors' protection and the structure of the financial system as well as the economic performance at industry and macroeconomic levels.Banks, private investors protection, growth

Capital budgeting under relational contracting: optimal ranking and duration criteria for schemes of concession, project-financing and public-private partnership

Project-financing and public-private partnership schemes are joint projects of investment that are generally submitted to investment valuation criteria based on compound discounting. However, the theoretical basis of these criteria is at issue nowadays. According to recent studies on relational contracting economics and behavioral finance, joint projects of investment can be considered as special relational environments where the project's returns improve on alternative replacement opportunities. This article aims to bridge the gap between new theories and widespread valuation techniques by providing a generalised approach to investment valuation. This article suggests new valuation criteria that fit those theoretical developments, including an endogenous optimal duration that the project's contractual agreement may integrate.discounting; investment decision criteria; capital budgeting; project finance and public private partnerships; endogenous optimal duration; cost of capital for government

Investment Decision in a Broadband Internet Network: A Real Options Approach

This article is a case study analysing the decision of a telecommunications operator to roll out ADSL infrastructures in areas of low population density. This type of investment is characterized by the risk of committing significant sunk costs for a low number of potential subscribers. In addition, the investment decision is complicated by the involvement of local authorities which are interested in offering broadband internet access to the local population, and are prepared to partially fund the project. Real options are used to calculate the project's value and optimal timing of the investment. Particular attention is paid to provide detail on how to perform real options analysis and valuation. The option is evaluated with the binomial model and we explain how to estimate key parameters such as volatility. The case study suggests that real options can produce a more sensible recommendation regarding investment timing than the net present value (NPV) rule. It also illustrates the benefits of real options beyond mere valuation aspects. In particular, this approach can help structure discussions with local authorities and enables the operator to establish a roll-out plan of ADSL infrastructures across the entire network.Investment under Uncertainty; real options; telecommunications networks; case study.