The effects of an uncertain abandonment value on the investment decision

YesUsing a three-factor stochastic real option model framework, this paper examines the effects of abandonment on the investment decision. Abandonment is classified according to whether the opportunity arises for an active operating asset post-investment, or for holding the project opportunity pre-investment. Separate analytical models are developed for the alternative forms of abandonment optionality. Numerical sensitivity analysis shows that the presence of a post-investment abandonment opportunity makes the investment opportunity appear to be more attractive because of the abandonment option value, but not by a considerable amount. Also, in contrast to the standard real option finding, an abandonment value volatility increase produces a project value threshold fall owing to the increase in the abandonment option value

Sensitivity of Investor Reaction to Market Direction and Volatility: The Case of Dividend Change Announcements

This study examines whether investor reactions are sensitive to the recent direction and/or volatility of underlying market movements. We find dividend change announcements elicit a greater change in stock price when the nature of the news (good or bad) goes against the grain of the recent market direction during volatile times. For example, announcements to lower dividends elicit a significantly greater decrease in stock price when market returns have been up and more volatile. Similarly, announcements to raise dividends tend to elicit a greater increase in stock price when market returns have been normal or down and more volatile, although this latter tendency lacks statistical significance. We suggest an explanation for these results that combines the implications of a dynamic rational expectations equilibrium model with behavioral considerations that link the responsiveness of investors to market direction and volatility.University of Kansas GRF Grant #348

An Investment Decision in a Life Insurance Company

The paper shows the development of the after-tax earnings from interest as a function of the proportion of money invested in each type of security and certain other parameters such as the interest yields and the tax rate. This function is then differentiated and the optimum point determined. A procedure is provided for computing the optimum proportion. "Management Technology", ISSN 0542-4917, was published as a separate journal from 1960 to 1964. In 1965 it was merged into Management Science.

Optimal Short Term Financing Decision

The cash requirements of many firms follow a seasonal pattern. These firms may obtain short term cash to cover their seasonal needs from a variety of sources: e.g., lines of credit, delaying of accounts payable, term loans, pledging or factoring receivables, etc. Each of these alternative sources of cash may have different costs as well as special restrictions. Given the set of cash requirements and the costs and constraints relating to alternative sources of cash, it is often difficult to determine the optimum manner of meeting the short-term cash needs. In this paper, this short-term financing problem under certainty is formulated as a mathematical model and solved through the use of a general linear programming routine. Optimum solutions are determined for a number of cases and the general form of the solution is discussed. The paper includes an analysis based on marginal costs and a discussion of the short-term financing problem under uncertainty.