Empirical evidence documents a tight link between aggregate and firm-level investment and corporate credit spreads. Moreover, it has been shown that credit spreads largely reflect a compensation for bearing macroeconoimc risks. We use a tractable model with recursive preferences and time varying macroeoconomic risk to investigate the link between aggregate risk and corporate policies in a produ...

Article history: Received 22 December 2008 Received in revised 4 February 2009 Accepted 6 February 2009 Available online 20 February 2009 This article integrates an earnings-based capital structure model into a simple real options framework to analyze the effects of managerial optimism and overconfidence on the interaction between financing and investment decisions. Several empirical implicatio...

I model inefficient resource allocations in M-form organizations due to influence activities by division managers that skew capital budgets in their favor. Corporate headquarters receives two types of signals about investment opportunities: private signals that can be distorted by managers, and public signals that are undistorted but noisy. Headquarters faces a tradeoff between the cost of atta...

Article history: Received 7 August 2014 Received in revised form 20 June 2015 Accepted 29 June 2015 Available online 9 July 2015 This study investigates whether a firm with strong corporate governance (CG) requires political connections (PCs), that is, we examine whether CG and PC substitute for or complement each other. Using 71,069 individual bank loan contracts from Taiwan, we examine how lo...

For variable annuities, the cost of hedging must be taken into consideration when firms use the dynamic hedging strategy. In this paper, we study hedging strategies by assuming the hedge position follows a random walk with boundary conditions. We find that re-balancing delta to the initial position is always more cost-efficient than re-balancing it to the edge for a fixed transaction cost. Howe...

We use Monte Carlo simulations and real data to assess the performance of methods dealing with measurement error in investment equations. Our experiments show that fixed effects, error heteroscedasticity, and data skewness severely affect the performance and reliability of methods found in the literature. Estimators that use higher-order moments return biased coefficients for (both) mismeasured...

We assess the impact of institutions on Chinese firms’ corporate investment in an investment Euler equation framework. We allow the variables measuring institutions to affect the rate at which firm managers discount future investment payoffs. Applying generalized method of moments estimators to large samples of Chinese firms, we estimate the stochastic discount rates derived from actual investm...

We introduce a computational model of the evolution of a research-based pharmaceutical firm and parameterize it using existing estimates of R&D costs, profit distributions, and candidate attrition rates. We use the model to estimate how the probability of continuously covering the capitalized costs of R&D from new product revenues depends on R&D scale. In the model, even small reductions in pro...

This article investigates how the job histories of CEOs influence their capital allocation decisions when they preside over multidivisional firms. I find that, after CEO turnover, divisions not previously affiliated with the new CEO receive significantly more capital expenditures than divisions through which the new CEO has advanced. The pattern of reverse-favoritism in capital allocation is mo...

This paper examines the effect of economic policy uncertainty and its components on firm-level investment. It is found that economic policy uncertainty in interaction with firm-level uncertainty depresses firms’ investment decisions. When firms are in doubt about costs of doing business due to possible changes in regulation, cost of health care and taxes, they become more guarded with investmen...