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Sovereign Debt: Optimal Contract, Underinvestment, and Forgiveness
The Journal of Finance, 1992ABSTRACTIn this paper we develop a time consistent rational expectations model which analyzes the equilibrium loan contract between a borrowing country and a foreign bank. The loan contract specifies both the amount of the loan and the promised interest payments, and rationally reflects the investment decisions of the country and the possibilities of ...
Schwartz, Eduardo S, Zurita, Salvador
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How underinvestment reduces underpricing
International Journal of Finance & EconomicsAbstractWe develop an economic model demonstrating that firms can benefit from committing to underinvestment. The model considers a firm's IPO, secondary‐market trading and subsequent investment decision. We analyse the conditions under which underinvestment can paradoxically be advantageous despite reducing the fundamental value of the firm.
Marco Bade, Hans Hirth
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Underinvestment or/and Overinvestment?
2012In Chapter 4 we highlighted the potential for market failure in allocating fixed capital, one reason being the difficulty of investment decision-making under uncertainty. That argument in itself may not be enough to convince doubters of the case for a negative bias to capital investment. It may for example reasonably be claimed that the ‘animal spirits’
Ciaran Driver, Paul Temple
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Competition for Procurement Contracts and Underinvestment
International Economic Review, 1990A two-period model is considered in which ex ante identical firms invest in period one, and in period two, after they learn their costs, the lowest cost firm is chosen as the winner of the contract. It is found that even though firms are racing against one another, they end up underinvesting relative to the ex ante socially optimal levels when the ...
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Underpricing versus Underinvestment in IPOs
SSRN Electronic Journal, 2005We study signaling equilibria at the IPO when owners determine not only the price at which to sell primary equity but also the amount of investment proceeds to raise. This implies owners have a choice of two signals at the IPO, i.e., investment oriented signaling and underpricing.
Andrew H. Roper, Min Shi
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Does Financial Reporting Conservatism Mitigate Underinvestment?
SSRN Electronic Journal, 2017This study examines the role of financial reporting conservatism in mitigating underinvestment problems. Recognizing that volatile cash flows increase the need to access external capital markets and that agency conflicts and information asymmetry make external capital costlier than internal capital, which leads managers to forgo valuable investment ...
Hyun A. Hong +2 more
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Public Markets and Underinvestment
2009VC exists because it promises to invest in bright new companies and give them the cash to grow, thus generating share price rise and the chance of substantial profit on their investment. The sections above show (in rather tedious detail) that it does not do so, and that the ‘gap’ in finance in Europe is in fact a reflection of this.
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Underinvestment in European Biotechnology
2009Why do new companies fail? We have looked briefly at aspects of management and entrepreneurship, the usual scapegoats for company failure. However, the objective evidence is that overwhelmingly companies fail through undercapitalisation.
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Corporate Insurance and the Underinvestment Problem
The Journal of Risk and Insurance, 1987A casualty loss produces option-like characteristics in assets because their value depends on further discretionary investment. With risky debt in the firm's capital structure, the shareholders can have incentives to forgo the discretionary investment, even though it has a positive net present value.
David Mayers, Clifford W. Smith
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