I review empirical research on the relation between capital markets and financial statements.The principal sources of demand for capital markets research in accounting are fundamental analysis and valuation, tests of market efficiency, and the role of accounting numbers in contracts and the political process.The capital markets research topics of current interest to researchers include tests of market efficiency with respect to accounting information, fundamental analysis, and value relevance of financial reporting.Evidence from research on these topics is likely to be helpful in capital market investment decisions, accounting standard setting, and corporate financial

We investigate whether investors price the option to abandon the firm for its liquidation value. Theory prices this real option as an American put with both a stochastic strike price (liquidation value) and a stochastic value of the underlying security (the value of cash flows). The major empirical implications are that firm value increases in liquidation value, after controlling for expected going-concern cash flows, and that more generalizable assets produce more abandonment option value. Using discounted earnings forecasts to proxy for expected cash flows, and relying on prior literature to categorize asset generalizability, we find strong support for abandonment option theory's predictions. 1. Introduction We investigate whether investors use information about the liquidation prices of the firm's assets to value their option to abandon the continuing business in exchange for the assets' liquidation value. As uncertainty about future cash flows is resolved, investors may wish to e...

We uncover a significant negative correlation between various volatility measures and private investment in developing countries, even when adding the standard control variables. No such correlation is uncovered when the investment measure is the sum of private and public investment spending. Indeed, public investment spending is positively correlated with some measures of volatility. These findings suggest that the detrimental impact of volatility on investment may be easier to detect using disaggregated data. We provide several possible interpretations for our findings. Nonlinearities in preferences or budget constraints can cause volatility to have first-order negative effects on private investment.

I survey and assess the development of continuous-time methods in finance during the last 30 years. The subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing, term structure theory, asset pricing, and optimal consumption and portfolio choices. During the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance. This latter subperiod has seen significant progress in econometric theory, computational and estimation methods to test and implement continuous-time models. Capital market frictions and bargaining issues are being increasingly incorporated in continuous-time theory. THE ROOTS OF MODERN CONTINUOUS-TIME METHODS in finance can be traced back to the seminal contributions of Merton ~1969, 1971, 1973b! in the late 1960s and early 1970s. Merton ~1969! pioneered the use of continuous-time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting.

We consider the impact of tax policy uncertainty on firm level and aggregate investment, comparing investment behavior when uncertainty is due to a shock following Geometric Brownian Motion (GBM) versus when random discrete jumps in tax policy occur. Expectations of the likelihood of a tax policy switch have an important negative impact on the gain to delaying investment in the latter model and time to investment can fall with increasing tax policy uncertainty. Aggregate investment simulations indicate that capital formation is adversely affected by increases in uncertainty in the traditional GBM model but can be enhanced in the jump process model. We also find that mean preserving spreads are attractive to firms when they have discretion over real behavior. In both models, a mean preserving spread lowers the cost of capital conditional on investment as firms shift investment from high to low cost periods. Ex ante mean preserving spreads in general lead to ex post decreases in the price of capital. We relate this 1 It is often said that nothing is certain in life except death and taxes. While death is

Most of the literature on real options considers the optimal decision of a firm in isolation from competitors. In reality, however, the actions of competing firms often affect each other's investment opportunities. We develop a game model where many firms compete for a single investment opportunity. When one of the firms triggers the investment the opportunity is completely lost for the other firms. The value of the project for the firms is assumed to follow a geometric Brownian motion. The model combines game theory and the theory of irreversible investment under uncertainty. We characterize the resulting Nash equilibrium under different assumptions on the information that the firms have about each other's valuations for the project. As an example, we present a case of building a telecommunications network.

This paper examines a declining duopoly, where the firms must choose when to exit from the market. The uncertainty is modeled by letting the revenue stream follow a geometric Brownian motion. We consider the Markovperfect equilibrium in firms' exit strategies. With a low degree of uncertainty there is a unique equilibrium, where one of the firms always exits before the other. However, when uncertainty is increased, another equilibrium with the reversed order of exit may appear ruining the uniqueness. Whether this happens or not depends on the degree of asymmetry in the firm specific parame- ters.

This paper considers irreversible investment in competing research projects with uncertain returns under a winner-takes-all patent system. Uncertainty takes two distinct forms: the technological success of the project is probabilistic, while the economic value of the patent to be won evolves stochastically over time. According to the theory of real options uncertainty generates an option value of delay, but with two competing firms the fear of preemption would appear to undermine this approach. In non-cooperative equilibrium two patterns of investment emerge depending on parameter values. In a preemptive leader-follower equilibrium firms invest sequentially and option values are reduced by competition. A symmetric outcome may also occur, however, in which investment is more delayed than the single-firm counterpart. Comparing this with the optimal cooperative investment pattern, investment is found to be more delayed when firms act non-cooperatively, as each holds back from investing in the fear of starting a patent race. Implications of the analysis for empirical and policy issues in R&D are considered.

Job Market Paper This paper analyzes the optimal investment decisions of heterogeneous Þrms in a competitive, uncertain environment. We characterize Þrms ’ optimal investment strategy explicitly, and derive a closed form solution for Þrm value. We show that in the strategic equilibrium real option premia are signiÞcant. As a result Þrms delay investment, choosing optimally not to undertake some positive NPV projects. The model predicts that Þrm returns vary over the business cycle, with returns negatively skewed during expansions but positively skewed in recessions.

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