This paper shows that the presence of conditional staging in R&D (Research & Development) has a critical impact on portfolio risk, and changes diversification arguments when a portfolio is constructed. When R&D projects exhibit option-like characteristics, correlation between projects plays a...

Risk parity is an asset allocation strategy designed so each asset class contributes equally to overall portfolio risk (as measured by volatility). While risk parity offers potential advantages, its success hinges on key assumptions and a favorable environment for bonds. Like the traditional...

The high cost of capital for firms conducting medical research and development (R&D) has been partly attributed to the government risk facing investors in medical innovation. This risk slows down medical innovation because investors must be compensated for it. We propose new and simple financial...

Approximate factor models and their extensions are widely used in economic analysis and forecasting due to their ability to extracting useful information from a large number of relevant variables. In these models, candidate predictors are typically subject to some common components. In this...

We develop a model to characterize and quantify the effects of stock, option, and fixed compensation on a manager's risk-taking incentive and investment choice. We find the average chief executive officer's (CEO) compensation contract incentivizes overinvestment by 1.3 percentage points per...

Defined-benefit (DB) pension funds, often underfunded, rely on the legal obligation of their sponsor to secure pension rights for individuals.Because that guarantee is risky, ways must be found to secure the pension promises. This paper is the first to identify the optimal pension fund...

The interaction of capital and risk for trading and treasury units is of primary interest in the corporate governance of banks as it links operational profitability and strategic risk management. During the financial crisis, several banks' trading units suffered significantly higher losses than...

This paper characterizes how firms' strategic interaction in product markets affects the industry dynamics of investment and expected returns. In imperfectly competitive industries, a firm's exposure to systematic risk is jointly affected by its own investment strategy and the investment...

Defined-benefit (DB) pension funds, often underfunded, rely on the legal obligation of their sponsor to secure pension rights for individuals. The sponsor guarantee being risky, its riskiness must be hedged to secure the pension promises. This appendix details the implementation of the extended...

We derive the optimal corporate pension portfolio policy in a consolidated setting in the presence of PBGC insurance. The paper's result formalizes the forces of risk shifting and risk management that shape the form of the corporate pension portfolio. As in Rauh (2009), the risk-shifting and...