Investment Timing for New Business Ventures

A key requirement for the start of many entrepreneurial business is private equity or venture capital financing. In the traditional approach to entrepreneurial investment analysis, an entrepreneur starts a new venture and a venture capitalist finances the new venture when business return exceeds the financial opportunity cost for comparable risk - the cost of capital for the new venture. The real options literature recommends that entrepreneurs delay business start due to investment irreversibility until business return reaches a threshold greater than the cost of capital. In this paper, we show that for new ventures with modest earnings volatility, an entrepreneur starts his/her business before return exceeds the cost of capital. We identify the circumstances in which the cost of capital is an unduly conservative return benchmark for the start of a new business and discuss the empirical implications of our findings

Essays in the economics of insurance markets

This dissertation investigates several aspects of the economics of insurance markets. First, conditions under which policies with deductible provisions, coinsurance provisions, or premium rebates are optimal are given. Results of previous papers on indemnity costs are considered as special cases. For both personal and commercial lines of insurance, further applications consider income taxes, interest income and acquisition costs. Second, the effect of individuals' characteristics on the trade-off between risk-sharing and incentives in a competitive insurance market affected by moral hazard is studied. An increase in the utility cost of effort decreases both prevention and coverage, while an increase in productivity of effort decreases loss frequencies and increases coverage. Decreases of utility in the loss state increase both prevention and coverage. Additional results establish the effect of wealth and risk aversion changes. Third, features of insurance markets that affect the use of reinsurance are examined. An active reinsurance market exists when the direct market is imperfectly competitive. The manager of an insurance firm with monopoly power takes reinsurance in preference to holding this on own account. Market power in the reinsurance market also restricts reinsurance. The manager of a monopsonistic insurer takes reinsurance when risk aversion is greater than that of clients; this is consistent with the interests of owners. The use of reinsurance is then decreasing with the ratio of policy-holder to manager risk aversion coefficients. Costs incurred by either insurers or reinsurers in the reinsurance market reduce the use of reinsurance, while costs incurred by insurers in the original transaction leave coverage provided by insurers themselves unchanged.Business, Sauder School ofGraduat

Corporate Sales, Predisclosure Information and Return Variability

This paper investigates the determinants of return variability between accounting report and non-report periods. A model of information dissemination in financial markets is developed which shows that if corporate sales activity is a source of predisclosure information, the ratio of return variability between accounting report and non-report periods decreases in contribution margin per dollar sales. Greater contribution margin increases that portion of cash flow variability which is predictable by investors' observation of sales activity and, therefore, contribution margin indexes the informativeness of sales-related predisclosure information. Greater informativeness increases return variability in the predisclosure period relative to the accounting report period. Supporting evidence for this prediction is presented. Copyright Blackwell Publishers Ltd 1997.

Managerial Preference, Asymmetric Information, and Financial Structur e.

If firm performance affects managers' wealth or reputation, preferences of managers dominate firms' financing decisions. When information about real a sset investment is symmetric, managers finance exclusively with equit y. If managers know more about investment quality than do investors, and if managers are sufficiently risk averse, they signal high qualit y projects with debt. Increases in collateral value decrease debt use Increases in interest rates, that do not change productive opportun ities, increase debt use. The explanation for these and further resul ts is based on underpricing of equity and overpricing of debt at the margin. Copyright 1987 by American Finance Association.

Corporate Sales, Equity Trading, and Risk

This paper proposes and investigates an explanation for a positive association between the signed value of common share returns and trading activity. The mixture of distributions model for stock returns and trading is applied with the added assumption that product sales for a firm is the directing process which generates the flow of information to equity markets. Because trading depends upon information arrival, sales and trading are positively related. Also, because contribution margin is positive, cash flows increase with sales. Dependence of both cash flows and trading on sales implies that returns and trading are also positively related. This explanation is tested in this paper. Copyright Blackwell Publishers Ltd 1999.

Value maximizing hurdle rates for R&D investment

We show that the value maximizing hurdle rate for research and development (R&D) investments among private firms operating in a market setting is less than for conventional investments despite the fact that R&D has development risk. Because development risk arises only during R&D, entrepreneurs control this risk by deferring or pursuing R&D depending upon profitability. This risk management moderates downside loss and encourages upside gain which increases the value attraction of R&D and decreases the value maximizing hurdle rate below that of conventional investment.R&D, hurdle rates, real options, Tobin's q,