We show that project evaluation should be based on free cash flows at nominal prices. We present a case where the results from the constant price method are biased upwards and there is a risk to accept bad projects. It is a widespread practice to evaluate projects at constant prices. With an...

Surprisingly there is a wide range of interpretations on how to calculate the cash flows for valuation purposes. This ample definition of what the cash flows are is shared by academicians and practitioners. Some of the definitions openly contradict the essential and basic concepts of cash flow...

Errors in estimated product costs often lead firms to win business that is unprofitable, because firms are more likely to win business when underestimated product costs lead them to bid below actual cost (Cooper et al. 1992; Stalk and Lachenauer 2004; Hilton 2005). Feedback from repeated competitive...

We develop a theory of delegation within organizations where agents are privately informed about whether they should be engaged in exploitation or in exploration activities. Excessive delegation lead agents to inefficiently herd into exploration in an attempt to boost their market value. The...

The direct material cost variance can be subdivided into a price variance, a quantity variance and a price-quantity interaction variance. The price-quantity interaction variance is rarely mentioned in the literature because the traditional price variance does not acknowledge an interaction...

This paper empirically examines how changes in the hierarchical structure of a large organization can affect incentives. The empirical analysis exploits a change in the hierarchical structure of the Corporate Division of a private foreign commercial bank in Argentina between 1999 and 2001. Using...

Many firms issue stock options to all employees. We consider three potential economic justifications for this practice: providing incentives to employees, inducing employees to sort, and helping firms retain employees. We gather data on firms' stock option grants to middle managers from three...

The objective of this study was to verify the influence of profitsharing/gainsharing plans on the performance of value drivers. The drivers evaluated were: growth of sales, investment in working capital, investment in fixed capital, operating profit margin, income tax rate, cost of equity, cost...

Using a detailed data set of employee stock option grants, we compare observed stock-option-based pay plans to hypothetical cash-only or restricted-stock-based plans. We make a variety of assumptions regarding the possible benefits of options relative to cash or stock, and then use observed...

In the financial appraisal of a project, the cashflow statements are constructed from two points of view: The Total Investment (TI) Point of View and Equity Point of View. One of the most important issues is the estimation of the correct financial discount rates for the two points of view. In...