Estimating the cost of capital through time: an analysis of the sources of error
Article Abstract:
A study was conducted to analyze sources of error in estimating required returns through time. A latent variable framework, represented by the risk-free rate of return, risk premium and risk measure, was utilized to model the problem of estimating the cost of capital. True values for the expected risk premiums were determined using the expected premium for the SP500 index and the true values of the coefficients. The values of the risk measures used in the study were characterized by a number of mean variance efficient portfolio, including capital goods producers, transportation industry, utilities, small stock portfolio and consumer durable goods producers. Results showed that errors in equity capital costs can be reduced by about 40% by utilizing current market indicators. They also indicated
Publication Name: Management Science
Subject: Business, general
ISSN: 0025-1909
Year: 1998
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Delay cost and incentive schemes for multiple users
Article Abstract:
The importance of cost application in a production facility that is used by two divisions is considered. In this case, each of the divisions causes costly delays for the other. The expected delay is determined by the division managers' chosen demand rates, the unobservability of which creates stochastic choice hazard problems. Moral hazard results from the unobservability of productive actions. It is shown that the presence of stochastic choice and moral hazards, and of incentive schemes that are based of the division's performance, necessitates a cost application to achieve a stable equilibrium in the sub-game of the division manager. However, the cost application must be greater than the expected marginal delay cost to inhibit the 'greedy' behavior of the division managers.
Publication Name: Management Science
Subject: Business, general
ISSN: 0025-1909
Year: 1995
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The effect of uncertainty and information asymmetry on the structure of compensation contracts: a test of competing models
Article Abstract:
A laboratory experiment was conducted as a follow-up study of an earlier experiment on the impact of perceived environmental uncertainty and perceived agent effectiveness on the composition of employment compensation contracts. The present experiment focuses on a 'specific unexpected' result of the earlier experiment. The researchers involved in the earlier experiment suggested an explanation for their unexpected finding based on an alternative theory under the same agency framework. The results of the present experiment ratify this alternative explanation and cite information symmetry/asymmetry as the contingent factor capable of reconciling the contradicting predictions of the two agency-based theories used.
Publication Name: Management Science
Subject: Business, general
ISSN: 0025-1909
Year: 1996
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