Capital budgeting, political risk and prudence.
Full text is not in this repository.
This item is available in the Library Catalogue
In this paper we consider the problem of project evaluation in internationally integrated cross border capital budgeting with political risk. The framework is multi-risk where the first risk is associated with the volatility of the investment's outcome and the second risk is political and is modeled as white noise associated with one or more of the possible investment outcomes. Using the concept of prudence, we show that for utility functions with positive absolute prudence, otherwise equivalent investments can be ranked according to which possible outcomes are affected by the political risk factor. In fact, the effect of political risk is inversely related to the level of the investment's outcome. This gives rise to what we call the "good times" rule, which states that political risk associated with good times (superior outcomes) is preferred to political risk associated with bad times (inferior outcomes). The better the outcome the less onerous is the political risk.
|Research Areas:||A. Middlesex University Schools and Centres > Business School > Accounting and Finance|
|Deposited On:||13 Apr 2010 12:20|
|Last Modified:||04 Mar 2015 14:39|
Repository staff only: item control page
Full text downloads (NB count will be zero if no full text documents are attached to the record)
Downloads per month over the past year