An Application of Covariance Analysis to Capacity Expansion at an Intermodal Blending Plant

Analysis of covariance (ANCOVA) integrates analysis of variance (ANOVA) and regression. The basic advantages of ANCOVA over ANOVA are: (1) generally greater power, and (2) reduction in bias caused by differences between groups that exist before experimental treatments are administered. ANCOVA has numerous possible applications in the evaluation of simulation output, especially where the values of covariates are not known until after the simulation experiment is completed. These covariates are uncontrolled experimental variables that influence the response but are themselves unaffected by the experimental factors. This paper provides an application of multiple analysis of covariance (MANCOVA) to a simulation experiment to determine whether an intermodal transfer and blending facility should add commodity handling and storage capacity. A discrete simulation model of the plant generated cash flows from several proposed capital projects. These cash flows indicated that capacity expansion was a prudent decision. However, when the treatment means for the various combinations of additional capacity were adjusted by MANCOVA for the same levels of operating volume and scheduling performance, the adjusted cash flows produced unacceptable financial returns. In this example, the increased precision of the MANCOVA model suggested that plant management should not invest in additional storage and commodity handling capacity.     

Cash Flow Modelling and Forecasting in Capital Budgeting Under Uncertainty*

The subject of this paper is modelling and forecasting of cash flows generated by a capital investment. The paper proposes the application of autoregressive, moving average, and mixed autoregressive moving-average processes to capital budgeting. In addition, models for deterministic, stochastic and seasonal trends are considered. For each class of cash flows, analytical expressions are developed for the mean and variance of a project's net present value (NPV). Also considered are several equilibrium pricing models. For two of them, the forecasting methodology developed here is integrated into the pricing equation. Although the overall emphasis of the paper is on modelling and forecasting of cash flows, the implications for NPV pricing and risk analysis are also investigated. Several examples are used to illustrate the impact of particular cash flow models on the price and risk of a project.     

AUTOCORRELATED CASH FLOWS AND THE SELECTION OF A PORTFOLIO OF CAPITAL ASSETS *

Capital budgeting models for analyzing real assets typically are based on a set of restrictive assumptions that influence financial managers' decisions and may prevent optimization of the firm's objectives. This research examines the common restrictive assumption that cash flows are intertemporally independent by first developing an economic state and simulation model based on a Markov process for including autocorrelated cash flows in the capital budgeting decision process and then demonstrating why managers should include autocorrelated cash flows in capital budgeting models by empirically testing the impact of assuming intertemporally independent cash flows on capital budgeting decisions. The results indicate that ignoring autocorrelated cash flows seriously limits the ability of capital budgeting models to provide optimal investment decisions. The model also is very attractive for practical application because it can be implemented with a minimum number of estimates and provides the set of input data required by a number of capital budgeting models. A discussion of the implementation of the model is included.     

Risk evaluation of investment projects

A survey is given of techniques for evaluation of risk in individual capital investment projects. The paper identifies the four types of relationships affecting project uncertainty: (1) Accounting-type relationships defining cash flow; (2) Statistical relationships among variables in a given time period; (3) Autocorrelation relationships among cash flows over time; and (4) Uncertainty about project life. Two types of decisions also can affect project profitability and uncertainty: (1) Strategy decisions; and (2) Abandonment decisions. Four types of models for risk evaluation are identified: (1) Certainty model; (2) Hillier model; (3) Monte Carlo model; and (4) Decision Tree model. These four types of models are compared and evaluated in terms of how easily they can incorporate the relationships and decisions mentioned above. Computational issues are also discussed. Suggestions are made for further research.     

Correction Constants for Present Values of Seasonal Cash Flows

In a recent Decision Sciences article, McMath (1990) developed the correction constants approach for eliminating the end-of-year bias in the present value of streams with subannual cash flows. A limitation of this approach is that it assumes subannual cash flows are level. In many types of businesses, subannual cash flows follow a predictable seasonal pattern and, consequently, a present value estimate based upon a level correction constant is biased. This article derives a general formula for determining correction constants for seasonal cash flow patterns, examines the direction and magnitude of the seasonal bias, and applies seasonal correction constants to a capital budgeting problem.     

The Information Content of Common Stock Repurchases: An Empirical Study1

Share repurchase announcements are known to be associated with significant positive abnormal stock returns. Past studies have argued that the main explanation of this value creation is that share repurchases signal new (and favourable) information about the repurchasing firms' future cash flows. This paper examines this hypothesis and provides evidence on the nature of the information revealed by share repurchases. Using a sample of 41 repurchase announcements from the USA, we show that the new information signalled to the stock market through share repurchasing is not only about changes in the level of future cash flows but also about changes in the riskiness of these cash flows.     

The impact of tax uncertainty on irreversible investment

Traditional models of capital budgeting with taxes are based on deterministic tax rates and tax bases. In reality, however, there are multiple sources of tax uncertainty. Frequent tax reforms make future taxation of investments a stochastic process. Fiscal authorities and tax courts create additional tax uncertainty by interpreting current tax laws differently. Moreover, simplified models that anticipate the actual tax base incorrectly contribute to tax uncertainty as perceived by investors. I analyze the effects of stochastic taxation on investment behavior in a real options model. The investor holds an option to invest in an irreversible project with stochastic cash flows and stochastic tax payments. Pre-tax cash flows and tax payments are assumed to be correlated. Increased tax uncertainty has an ambiguous impact on investment timing. For low tax uncertainty, high cash flow uncertainty and high correlation of cash flows and tax payments, increased tax uncertainty is likely to accelerate investment. A higher expected tax payment delays investment. A higher after-tax discount rate affects investment timing ambiguously.     

A Data‐Driven Inventory Control Policy for Cash Logistics Operations: An Exploratory Case Study Application at a Financial Institution

A number of market changes are impacting the way financial institutions are managing their automated teller machines (ATMs). We propose a new class of adaptive data‐driven policies for a stochastic inventory control problem faced by a large financial institution that manages cash at several ATMs. Senior management were concerned that their current cash supply system to manage ATMs was inefficient and outdated, and suspected that using improved cash management could reduce overall system cost. Our task was to provide a robust procedure to tackle the ATM's cash deployment strategies. Current industry practice uses a periodic review system with infrequent parameter updates for cash management based on the assumption that demand is normally distributed during the review period. This assumption did not hold during our investigation, warranting a new and robust analysis. Moreover, we discovered that forecast errors are often not normally distributed and that these error distributions change dramatically over time. Our approach finds the optimal time series forecaster and the best‐fitting weekly forecast error distribution. The guaranteed optimal target cash inventory level and time between orders could only be obtained through an optimization module that was embedded in a simulation routine that we built for the institution. We employed an exploratory case study methodology to collect cash withdrawal data at 21 ATMs owned and operated by the financial institution. Our new approach shows a 4.6% overall cost reduction. This reflects an annual cost savings of over $250,000 for the 2,500 ATM units that are operated by the bank.     

When labor representatives join supervisory boards: empirical evidence of the relationship between the change to parity codetermination and working capital and operating cash flows

We examine how the change to 50% labor representation on German supervisory boards is related to working capital and operating cash flows, since both are proxies for short-term financial policies. We expect the change to be associated with reduced working capital and increased operating cash flows. Using a difference-in-differences model, we compare a sample of listed and non-listed firms that changed to parity codetermination between 1987 and 2014 with two different groups of control firms that did not change their level of codetermination. In line with our hypotheses, the results suggest that a change to parity codetermination is related to lower working capital and higher operating cash flows compared to our control firms. We conclude that firms begin to engage in more efficient working capital management due to the change to parity codetermination on supervisory boards. We also conclude that the positive short-term effects on the firms’ operating performance imply that labor representatives do not bear just the interests of employees in mind, but also those of other stakeholders.     

公司价值的随机优化模型

本文研究了净现金流为随机过程情况下的企业价值,并建立了企业价值的随机优化模型。探讨了在一定的风险水平和其它相关约束条件下,确定企业的资本结构、企业债务的承担能力等,使得公司价值最大化,并应用于实际项目中。     

Applied Capital Budgeting with Cash Flow Dependencies*

This article provides decision makers with a method of determining the variability and acceptability of a major capital investment. The model used here differs from previous models in that it does not use simulation, nor does it require a normal distribution for the cash flow component. Further, it has no restrictions on whether cash flows are dependent. An example of the technique is included.     

基于自由现金流量的证券投资组合分析

通过比较中美两国在处理和计算自由现金流量方面的不同,提出自由现金流量的计算方法,并论述了在我国会计准则下如何通过会计调整计算自由现金流量。在获得公司自由现金流量的基础上,通过引入自由现金流量乘数和自由现金流量负债比,结合经营现金流量、市盈率和低财务杠杆指标,构造了基于自由现金流量的证券投资组合,对我国证券市场做出实证分析。同时,对比其他投资策略的实际效果,证明基于自由现金流量的投资策略所具有的优越性。     

Robust Contracts in Continuous Time

We study a continuous‐time contracting problem under hidden action, where the principal has ambiguous beliefs about the project cash flows. The principal designs a robust contract that maximizes his utility under the worst‐case scenario subject to the agent's incentive and participation constraints. Robustness generates endogenous belief heterogeneity and induces a tradeoff between incentives and ambiguity sharing so that the incentive constraint does not always bind. We implement the optimal contract by cash reserves, debt, and equity. In addition to receiving ordinary dividends when cash reserves reach a threshold, outside equity holders also receive special dividends or inject cash in the cash reserves to hedge against model uncertainty and smooth dividends. The equity premium and the credit yield spread generated by ambiguity aversion are state dependent and high for distressed firms with low cash reserves.     

Correction Constants for Present Values of Sub-Annual Cash Flows*

When future cash flows are expected to occur at sub-annual intervals, it is widely recognized that present value estimates are biased by the common assumption that each year's flows occur at year-end. Although a “brute force” remedy for the end-of-year (EOY) bias is well known, the method does not appear to be generally used for financial decisions. The author suggests the possible reasons for continued tolerance of EOY bias are that the present method for eliminating the bias is too cumbersome or that the amount of bias is thought to be negligible. The paper also (a) examines the current remedy, indicating several features that hamper its use, (b) presents a correction constant approach that simplifies calculation of unbiased present values for streams of sub-annual cash flows, (c) derives expressions for correction constants under two alternative assumptions about sub-annual discounting, and (d) demonstrates use of the constants and the possible decision-relevance of EOY bias by a simple capital budgeting example.     

我国上市公司CFO薪酬与盈余质量的相关性研究

本文研究了我国上市公司CFO薪酬与盈余质量的相关性.研究发现,随着我国上市公司治理机制的不断完善,上市公司逐步建立起了以盈余为业绩指标的CFO薪酬激励机制.通过文章逐层递进的研究,我们发现我国上市公司CFO薪酬激励契约显著地区别反映了盈余中的非经常性损益和经常性损益,但是却未能有效地区别反映经常性损益中的应计项目和经营性现金流,存在类似"功能锁定"的现象.进一步细分研究样本后,我们发现由于盈余管理上市公司CFO薪酬激励契约对非经常性损益和经常性损益的不合理权重赋值,扭亏上市公司的CFO薪酬激励契约反而刺激了CFO进行盈余管理.根据研究我们认为,解决CFO薪酬激励契约对应计项目和经营性现金流的"功能锁定"现象,改进盈余管理上市公司CFO薪酬激励契约成为目前我国上市公司完善CFO薪酬激励机制的两个重要任务.     

公允价值的运用与应计利润功能——基于中国新旧会计准则比较的研究

与现有文献多从价值相关性角度研究公允价值的实施后果不同,本文通过考察我国新准则下应计利润功能的变化来评价公允价值对会计盈余的影响.以2006年非金融类上市公司为样本,我们发现新准则下各期经营性现金流对应计利润的解释能力显著下降,应计利润与上期现金流之间的正相关关系,以及与本期现金流之间的负相关关系都所有减弱,但与下期现金流之间的正相关关系以及对之的预测能力显著增强,对经济收益的确认更加及时和充分.鉴于新准则对会计盈余、特别是应计利润的系统性影响主要来自于公允价值的运用,这些证据表明实施公允价值能够增强应计利润确认经济收益功能,但会削弱其降低现金流噪音功能.     

Risk control in maritime shipping investments

In this paper we extend the state-of-the-art stochastic programming models for the Maritime Fleet Renewal Problem (MFRP) to explicitly limit the risk of insolvency due to negative cash flows when making maritime shipping investments. This is achieved by modeling the payment of ships in a number of periodical installments rather than in a lump sum paid upfront, representing more closely the actual cash flows for a shipping company. Based on this, we propose two alternative risk control measures, where the first imposes that the cash flow in each time period is always higher than a desired threshold, while the second limits the Conditional Value-at-Risk. We test the two models on realistic test instances based on data from a shipping company. The computational study demonstrates how the two models can be used to assess the trade-offs between risk of insolvency and expected profits in the MFRP.     

Residual income valuation and management remuneration under uncertainty: a note

The so-called Residual Income Valuation theorem states that the value of a project or a firm can be determined either on the basis of cash flows between the firm and its owners or by using residual incomes, provided that cash flows and residual incomes are derived from a set of accounting data that fulfills certain regularity conditions. Residual income is defined as accounting earnings reduced by a capital charge on book equity capital. In this paper it is shown that this theorem also applies when residual incomes and in particular the discount factors are uncertain. Risk-aversion of principals and agents is taken into account on the basis of properly defined risk-adjusted discount rates. This approach is preferred as it facilitates practical application. Implications are drawn with regards to valuation but also to the design of management remuneration systems. It is shown that the capital charge rate used to determine the performance-related compensation component should be reduced below the risk-adjusted rate, if the fixed component falls below a certain threshold. Absent agency cost or other externalities, the reduction of the capital charge rate is required to avoid underinvestment.     

基于实物期权的研发项目动态投资决策模型

本文基于实物期权理论,针对研发项目阶段性特点,结合博弈论的思想,分析了多个研发项目组成的投资状态组合,构建了研发项目动态选择模型。首先,根据研发项目多阶段的特征,利用孪生证券的思想,基于实物期权理论,建立了项目中止决策准则;在此基础上分析研发项目的投资决策状态,建立了二十五个状态的切换场景;然后通过实际算例对模型进行验证和分析,得出了研发项目投资的影响范围概念图,最终实现两个项目的最优投资决策目标。     

The value of board monitoring in promoting R&D: a test of agency-theory in the US context

Prior agency-theory research has presented conflicting findings regarding the importance of board monitoring in motivating R&D. We reinvestigate this literature by examining the value monitoring exerts in abating both the agency costs of underinvestment and overinvestment in R&D. We argue that monitoring that relies on board independence has both benefits and costs associated with promoting R&D. While we assert that intense monitoring by the board heightens underinvestment in the US context, it can also provide discipline over a firms free cash flows. We test our theory using a longitudinal panel data set consisting of a cross-section of S&P 1500 US-firms between 1997 and 2007. On average our study finds inside directors increase overinvestment in R&D, but facilitate better resource allocation when a firm has rich growth opportunities. Also, while too much emphasis on outside directors heightens underinvestment in R&D, a more independent board encourages better resource allocation when firms have high free cash flows that need to be paid back to owners. Thus, our results suggest a more inclusive perspective of agency-theory can help managers make better R&D investment decisions.