We reveal properties of electricity spot prices that cannot be captured by the statistical models, commonly used to model financial asset prices, that are increasingly used to model electricity prices. Using more than eight years of half-hourly spot price data from the New Zealand Electricity...

Conventional wisdom, repeated in standard corporate finance texts, is that greater operating leverage increases systematic risk and therefore leads to a higher expected rate of return earned by a firm's owners. This paper shows that the relationship between operating leverage and the expected...

We present a model featuring irreversible investment, economies of scale, uncertain future demand and capital prices, and a regulator who sets the firm's output price according to the cost structure of a hypothetical replacement firm. We show that a replacement firm has a fundamental cost...

Real options analysis typically assumes that projects are continuously evaluated and launched at precisely the time determined to be optimal. However, real world projects cannot be managed in this way because of the costs of formally evaluating an investment opportunity. This paper analyzes how...

The last thirty years have witnessed a fundamental change in the regulation of infrastructure industries. Whereas firms were subject to rate of return regulation and protected from entry in the past, now they face various forms of incentive regulation, competition is actively promoted by many...

In infrastructure industries the permitted revenue of a regulated firm depends crucially on the choice of rate base and the allowed rate of return. In this paper we examine the impact of these two variables on the timing of the regulated firm's investment. Since the firm bears all the cost of...

Popular investment advice recommends that the stock/bond and stock/wealth ratios should rise with investor risk tolerance and investment horizon respectively, prescriptions that are difficult to reconcile with standard models of portfolio choice. Canner et al. (1997) point out that the first...

We show that regulators' price-setting, rate base, and allowed rate of return decisions are inextricably linked. Once regulators switch from traditional rate of return regulation, the irreversibility of much infrastructure investment significantly alters the results of the usual approach to...

We analyze the optimal hedging policy of a firm that has flexibility in the timing of investment. Conventional wisdom suggests that hedging adds value by alleviating the under-investment problem associated with capital market frictions. However, our model shows that hedging also adds value by...

We analyze the dynamic investment decision of a firm subject to an endogenous financing constraint. The threat of future funding shortfalls lowers the value of the firm's timing options and encourages acceleration of investment beyond the first-best optimal level. As well as highlighting another...