Risk Aversion and Timber Harvest Strategies: A Case Study of Nonindustrial Private Forest Management in Louisiana

Forest owners face many challenges regarding forest management due to the long period from planting to harvest. Along with the economic and environmental factors that influence management actions, the owners' attitude to risk plays a crucial role in forest management decisions. This study shows that understanding the effects of the owner's risk preference for management actions is an important step to form an effective forest policy. The objectives of the study are to (1) assess the economic advantage of forest management alternatives over a range of risk aversion coefficients and (2) determine the financial incentive (risk premium) corresponding to a forest owners' risk attitude. We implemented the stochastic efficiency with respect to a function framework to evaluate a set of fertilization, herbicide, and thinning management alternatives at mid-rotation loblolly pine plantations in Louisiana. Results from this study indicate that forest owner's risk preference affects their decision to select management actions. Financial incentives are substantially different for specific management alternatives between risk-neutral and risk-averse forest owners. The results can guide forest policy development where agencies can modify financial assistance programs to improve the adoption of management actions.

How to Determine the Cost of Capital for a Commercial Forestry

This paper focuses on designing a methodological workflow to fill a knowledge gap for determining the cost of capital for commercial forestry projects. Upon reviewing the literature, a method to determine the cost of capital for profit-oriented forestry seems to be lacking. Accordingly, we selected and analyzed 42 companies that do businesses worldwide, are present on the stock exchange, and possess or lease forest land. Based on their business activities (growing forest, sawmilling, final production, paper production), these companies are classified into four subgroups. An algorithm has been devised using the concept of risk diversification and the capital asset pricing model for three groups of investors and four forestry subgroups. In doing so, the real risk-free rate (0.43%) is set as the difference between an average return on 10-year US government bonds (2.59% nominal) and the 10-year average US inflation rate (2.16%). The measure of forestry systematic risk (beta coefficient) varies between 0.83 and 1.41, while the equity (stock exchange market) risk premium is set to 6%. Unsystematic risk is determined using a process of mapping which takes into account all risk elements marked as relevant for the forestry sector. This approach provides results that reveal the cost of capital varying between 5.41% and 16.55% based on the current level of an investor's portfolio diversification and the risk characteristics of the forestry subgroup. Finally, the forestry companies meeting the investor's expectations are noted as preferable investment opportunities.

The Effect of Managerial Share Pledges on the Cost of Debt

We examines whether share pledges by controlling shareholders influence a firm’s cost of debt. We also investigate whether the relationship between share pledges and the cost of debt stems from the managerial risk-taking incentives or pursuing the private benefits of controlling shareholders. We make three major findings. First, we find the cost of debt is higher in firms with share pledges than in firms without share pledges. Furthermore, we identify a positive relationship between the cost of debt and the level of share pledges. Second, we find that there is no increased corporate financial leverage or investment activities in firms with share pledges. Finally, our empirical evidence demonstrates that the positive relationship between share pledges and cost of debt is more pronounced for lower foreign institutional investor stakes or higher controlling shareholders ownership. Overall, the results indicate that share pledges by controlling shareholders negatively affect the cost of debt. However, the effect of share pledges on the cost of debt is differently influenced by a firm’s ownership structure. Our findings suggest that share pledges induce stockholder-bondholder conflict, and the bondholder requires more risk premium due to the decrease of firm value.

Emerging Markets Interest Rates, International Reserves and Net Foreign Assets

In the context of a managed float regime, we adopt the portfolio balance view to show the effects of the net foreign assets of an economy and its gross international reserves level on interest rate differentials. We argue that the interest rate differential can be explained by three components, where the components are the expected depreciation of the domestic currency, a default risk premium, and a portfolio balance premium. Our theoretical analysis suggests that the interest differential is a convex function of the level of gross international reserves. In particular, the differential and gross reserves are inversely related at low levels of reserves, but positively at higher levels. We evaluate our framework for the case of Lebanon. We find that the differential is inversely related to both net foreign assets and gross international reserves. These findings are then confirmed with data from Indonesia and Mexico.

Does Momentum Trading Generate Extra Downside Risk?

Momentum strategies tend to provide low returns during market crashes, and they crash themselves when the market rebounds after significant crashes. This is reflected by positive downside market betas and negative upside market betas of zero-cost momentum portfolios. Such asymmetry in upside and downside risks is unfavorable for investors and requires a risk premium. It arises mechanically because of momentum portfolio rebalancing based on trailing asset performance. The asymmetry in upside and downside risks is a robust unifying feature of momentum portfolios in various geographical and asset markets. The momentum premium can be rationalized within a standard asset-pricing framework, where upside and downside risks are priced differently.

Will the Reduction of CO2 Emissions Lower the Cost of Debt Financing? The Case of EU Countries

The main objective of this article is to test the relationship between the intensity of CO2 emissions and company’s cost of debt capital. This study fills a gap in the financial literature on this compound by examining a sample of 225 large nonfinancial enterprises operating in 15 EU countries in the years 2018–2021. The fractional logit regression controlling for company’s characteristics (assets, profitability, liquidity and leverage) was used. The results show that by reducing the intensity of CO2 emissions, a company can reduce the cost of debt. This relationship was confirmed for three measures of intensity, i.e., CO2 emissions in relation to revenues, assets and number of employees. Markets and financial institutions impose an additional risk premium in relation to companies operating in an industry considered to be comprised of strong CO2 emitters. The use of the latest data for a wide sample of European enterprises provides an up-to-date assessment of the analyzed issues and the results can be used by enterprises and public authorities when analyzing the benefits of implementing a technology that reduces CO2 emissions.

Investor sentiment measurement based on technical analysis indicators affecting stock returns: Empirical evidence on VN100

The purpose of this study is to examine whether investor sentiment as measured by technical analysis indicators has an impact on stock returns. The research period is from 2015 to mid-2020. 1-year government bond yields, financial data, transaction data of 57 companies in the VN100 basket, and VNIndex are analyzed. The investor sentiment variable is measured by each technical analysis indicator (Relative Strength Index – RSI, Psychological Line Index – PLI), and the general sentiment variable is established based on extracting the principal component from individual indicators. The paper uses two regression methods – Fama-MacBeth and Generalized Least Square (GLS) – for five different research models. The results show that sentiment plays an important role in stock returns in the Vietnamese stock market. Even controlling the factors such as cash flow per share, firm size, market risk premium, and stock price volatility in the studied models, the impact of sentiment is significant in both the model using individual technical indicators and the model using the general sentiment variable. Furthermore, investor sentiment has a stronger power to explain excess stock returns than their trading behavior. The implication from the results shows that the Vietnamese stock market is inefficient, in which psychology is a very important issue and participants need to pay due attention to this factor. AcknowledgmentThis study was funded by the Industrial University of Ho Chi Minh City (IUH), Vietnam (grant number: 21/1TCNH03).

The Influence of Policy Risk on Swiss Wind Power Investment

Wind energy is one of the most affordable and fastest-growing sources of electricity worldwide. As a large share of wind power generation occurs in the winter season, it could make an important contribution to seasonal diversification of domestic electricity supply. However, the development of wind energy projects in Switzerland has been characterized by long and complex administrative processes, with the planning phase taking up to a decade, more than twice as long as the European average. The objective of this chapter is to quantify the risk premium that lengthy permitting processes imply for wind energy investors in Switzerland and to suggest ways to reduce policy risk. The data have been gathered through 22 confidential interviews with project developers and several cantonal permitting agencies as well as a review of federal and cantonal regulatory documents. Furthermore, a discounted cash flow model was built to compare the profitability indicators (IRR, NPV) and the levelized cost of electricity (LCOE) of a reference case to scenarios with various risks—for example, delays in the permitting process, downsizing the project, or changes in the regulatory environment such as phasing out feed-in tariffs. The model shows that the highest profitability risks are related to the availability of a feed-in tariff, but other changes in the permitting process can also have a critical impact on the project’s bottom line. The findings illustrate a significant policy risk premium in the pre-construction stage faced by wind energy project developers in Switzerland.