This paper examines the implications of the option value of equity for firms' disclosures. Merton (1974) shows that the equity of levered firms is equivalent to a call option whose value increases in the expected variance of future cash flows. I use this equivalence to calculate firms' vega,...

This paper shows that the notion of rate of return is best understood through the lens of the average-internal-rate-of-return (AIRR) model, first introduced in Magni (2010a). It is an NPV-consistent approach based on a coherent definition of rate of return and on the notion of Chisini mean, it...

Health-insurance premiums account for a significant portion of the cost base of U.S. corporations. A recent study finds that health-insurance premiums increase for firms that experience positive profit shocks (Dafny 2010), suggesting that the U.S. health-insurance market is not perfectly...

We examine the relation between labor union strength and investment efficiency using comprehensive firm-level data of Korean listed companies. We find that the perceived underinvestment related to unionization documented in previous studies is attributable to a negative relation between union...

This paper examines how accounting audits impact investment decisions in the presence of agency conflicts. Investors choose between a short-term risk-free asset and a long-term risky project. The manager in charge of the latter has incentives to inflate interim payoffs to be able to continue a...

For investing in profitable ventures, the firms intend to recover the investment made in them. Thus, the determination of the respective cost of capital of a venture can provide a base for making decisions on whether to accept the project profitably. In this context, this paper provides some...

We propose a genuinely internal approach to project valuation and decision based on the average Return On Investment (ROI), obtained as the ratio of total operating profit (NOPAT) to total invested capital or, equivalently, as the ratio of net cash flow to total invested capital. The approach...

Firms make extensive use of operating leases, but unlike other types of debt, their balance sheet value is set by the firm. Using novel information on operating leases from new reporting requirements (ASC 842) we examine firm behavior in valuing these leases, specifically, discount rate choices....

Free Cash Flow (FCF) was adopted in the late 1980s as a financial tool to evaluate the firm and its individual projects. We question the procedure of calculating the FCF where a significant portion of Current Liabilities is offset against Current Assets, thereby creating the hybrid asset Net...

Using management earnings forecasts over the period 1996-2010, I find that the sensitivity of forecast revisions to contemporaneous stock returns is increasing in the amount of investors' private information in prices. This effect remains after controlling for various confounds and is robust to...