Return on investment

Return on investment (ROI) or return on costs (ROC) is a ratio between net income (over a period) and investment (costs resulting from an investment of some resources at a point in time). A high ROI means the investment's gains compare favourably to its cost. As a performance measure, ROI is used to evaluate the efficiency of an investment or to compare the efficiencies of several different investments. In economic terms, it is one way of relating profits to capital invested. Purpose In business, the purpose of the return on investment (ROI) metric is to measure, per period, rates of return on money invested in an economic entity in order to decide whether or not to undertake an investment. It is also used as an indicator to compare different investments within a portfolio. The investment with the largest ROI is usually prioritized, even though the spread of ROI over the time period of an investment should also be taken into account. Recently, the concept has also been app

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Constructed wetland for the treatment of surface waters from combined sewer overflow (CSO) of La Chaux-de-Fonds

Blaise Adrien Devaud

The Doubs river is an ecosystem-rich river which is threatened by several anthropic activities. The three dams placed in the river as well as the discharge of pollutants contribute to the degradation of its natural habitats. The city of La Chaux-de-Fonds is directly concerned by this issue. The combined sewer overflow (CSO) waters generated by the city discharge in la Ronde, an affluent of the Doubs. These waters represent a potential threat to the Doubs water quality, this is why the authorities of La Chaux-de-Fonds need to take measures to limit the impacts of these waters in the natural environment. These measures have to be taken without causing excessive costs. Several solutions have been considered according to the objectives set during the development of the « plan d’évacuation des eaux (PGEE) » of the city. The implementation of a constructed wetland was the selected solution. This system is widely used in a number of European countries and especially in France, but is not yet much developed in Switzerland. Topographic and design constraints have lead the choice of a vertical flow constructed wetland. Its technical feasibility has been deeply studied. The design of the constructed wetland has been examined using the simulation tool Orage (which is currently in phase test in the IRSTEA research institute in Lyon). A second tool, the Rebeka software, allowed to determine the impact of the CSO water on the water quality of the Doubs. The STORM approach helped to integrate these impacts in the design of the system from the beginning of the the project. The costs of the project are detailed in investment costs for the building of the wetland and operation costs which represent essentially functioning and maintenance costs. The treatment system consists of three planted filters which operate in parallel. Simulation results demonstrate that the objectives of the project are fulfilled. The installation has a removal efficiency of 29% on ammonium, 44% on COD and 95% on TSS. The initial investment is 3.6 million Swiss francs. This system offers a solution to resolve pollution issues originating from the CSO waters of the city of La Chaux-de-Fonds with a reasonable initial investment.

2016

Three Essays on Corporate Disclosure

Evgeny Petrov

Corporate disclosure is the most important source of information about the firm for the outside investors. While some disclosure of public firms is mandated by regulation, firm managers can provide extra information at their discretion by making voluntary disclosures. On the other hand, even the reports required by regulation can be disclosed untruthfully. This thesis is structured in three chapters, each addressing a specific issue in voluntary disclosure and misreporting. In the first chapter, titled

Voluntary Disclosure and Informed Trading'', I study the impact of informed trading on voluntary corporate disclosure in the presence of two frictions: cost of disclosure and value of manager's information. In the absence of both frictions, informed trading has no impact on disclosure even when traders are not certain whether the manager has information. If disclosure is costly, then informed trading reduces disclosure. Since traders can discover favorable information about the firm, additional disclosure of the information is not necessary. If manager's information is valuable for the firm, then informed trading increases disclosure. Since traders can discover unfavorable information about the firm, the manager with such information has less incentives to pool with uninformed managers and discloses to show that he is informed. I also show that informed trading can have both a positive and a negative real effect on the firm value by crowding in or crowding out information production in the firm. These results hold for general information structures and are robust if traders can choose how much information to acquire. The second chapter, titled

Misreporting and Feedback Effect'' and co-authored with Prof. Hui Chen of the University of Zurich, studies the incentives of firms to misreport information in the presence of feedback effect from financial markets. Stock price often provides firms with new information, which can be used in the firms' subsequent real decisions. We examine how this informational feedback from the financial market affects a myopic firm manager's incentive to misreport, and how the misreporting further affects the firm's price and value. We find that the manager overstates his report more in the presence of feedback, but this misreporting brings forth both positive price and real effects for the firm. Intuitively, overstating the report encourages information production in the market because (a) it renders accounting reports less reliable as a source of information, and (b) investors expect higher trading profits from larger capital investment. The new incremental information improves investment efficiency when it is revealed to the firm manager through trading and used in the firm's subsequent investment decisions. As a consequence, the capital investment is higher when there is feedback effect. In the third chapter, titled ``Voluntary Disclosure and Margin Constraints'', I develop a dynamic model of voluntary corporate disclosure that explains clustering of negative announcements observed in practice. A manager may receive a signal about the firm's asset value and can disclose it to traders with margin constraints. I show that the manager postpones delivery of a negative signal until the margin constraints tighten. In contrast to previous studies, the clustering of announcements happens even if there are no negative updates in traders' beliefs about the firm value.

EPFL2017

Essays in Financial Economics

Jan Peter Kulak

In the first chapter of this thesis, I empirically show that the time delay firms face in raising outside capital affects cash holdings. I exploit the 2005 US Securities Offering Reform (the Reform) as a quasi-natural experiment. For a subset of large public US firms, the Reform relaxed the requirement to undergo the standard review process with the Securities and Exchange Commission (SEC) before raising new public capital, leading to a reduction in regulatory delay of approximately 1-1.5 months on average and exceeding half a year in extreme cases. Difference-in-differences estimates based on the event suggest a causal channel from time delay to cash holdings. Over the course of the year following the Reform, affected firms reduced their cash holdings by approximately 2-3% as a fraction of book assets relative to unaffected control-group firms. As predicted by theory, the effect is strongest among firms in cash flow volatile industries. The second chapter investigates whether seasoned equity offerings (SEOs) are accompanied by price pressure effects that models of investor inattention and slow-moving capital predict. In line with theoretical predictions, I find that the share prices of issuing firms exhibit a drop in the pre-offer week, and a positive trend in the first four to eight weeks thereafter. The pattern is systematically related to the size of an offering and to measures of the amount of attention the issuing firm receives by market participants. The resulting costs to the issuing firm are on the order of 2% as a fraction of offer proceeds for the average firm, and nearly twice as large for the tercile of firms issuing the largest quantities of illiquid stock. The price impact is so sizable and long-lasting that simple monthly trading strategies that purchase SEO stocks in the first calendar month after an offering yield monthly five-factor alphas exceeding 1.5 percentage points. The abnormal returns are most pronounced in periods of low aggregate stock market liquidity, as measured by the Pástor and Stambaugh (2003) liquidity index. The results are consistent with the interpretation that the return pattern represents a compensation to temporary liquidity providers, who require the largest compensation during periods in which funding liquidity is scarce. The third chapter is joint work with Cornelius Schmidt from the University of Lausanne. We propose a novel setting to test how the presence of attention constraints affects stock prices. Our setting exploits the particular industry exposure of vertically integrated firms. Because of inter-segment sales of goods, the relative size of individual segments within such firms, in an accounting sense, is a misleading indicator for the firm's overall exposure to industry shocks. We hypothesize that attention constrained investors will tend to neglect this detail, leading to systematic pricing mistakes after confounding, industry-specific news shocks. In line with this hypothesis, we find evidence of predictable price corrections in post-news periods – in particular in the time around firms' earnings announcements. A fully implementable long-short equity strategy based on the phenomenon leads to significant risk-adjusted excess returns. Security analysts' earnings forecasts exhibit a predictable error in the same direction as stock prices.

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