Internal rate of return

Internal rate of return (IRR) is a method of quantifying the merits of a project or investment opportunity. The calculation is termed internal because it depends only on the cash flows of the investment being analyzed and excludes external factors, such as returns available elsewhere, the risk-free rate, inflation, the cost of capital, or financial risk. The method may be applied either ex-post or ex-ante. Applied ex-ante, the IRR is an estimate of a future annual rate of return. Applied ex-post, it measures the actual achieved investment return of a historical investment. It is also called the discounted cash flow rate of return (DCFROR) or yield rate. Definition (IRR) The IRR of an investment or project is the "annualized effective compounded return rate" or rate of return when the net present value (NPV) of all cash flows (both positive and negative) from the investment is assumed to be equal to zero. Equivalently, it is the interest rate at which the n

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Technology Strategy in Dynamic Environments: A Computational Analysis of the Automation of Routines, the Organization of AI, and the Evaluation of Technology Risk

In this dissertation, I develop theory and evidence to argue that new technologies are central to how firms organize to create and capture value. I use computational methods such as reinforcement learning and probabilistic topic modeling to investigate three topics: the automation of routines, the organization of artificial intelligence (AI), and the evaluation of technology risk. Overall, I argue that new technologies are not a panacea for the firm but require deliberate strategic planning to manage the potential downsides of myopic automation, AI interdependencies, and the disclosure of technology risks.In the first essay, I argue that while automation can increase productivity by reducing the costs of coordinating individuals, the automation of routines can also incur an indirect opportunity cost due to slow adaptation to environmental change. I develop a reinforcement learning simulation to model the impact of automation on the returns from the division of labor in dynamic environments and to show how automation incurs opportunity costs through lost learning and slow adaptation. Moreover, automation can be suboptimal when it brings about myopic behavior, i.e. high returns from the division of labor in the short term, but negative returns in the long term. Given the simulation results, I argue that firms need dynamic routines to simultaneously balance learning and automation. I open-source the simulation platform as OrgSim-RL on GitHub.In the second essay, I argue that a data-driven culture - what I define as a Data Clan - can help to coordinate complex interdependencies between AI components within a firm. I analyze in-depth semi-structured interview data with a hierarchical stochastic block model (hSBM) and hand-coding to find that managers focus primarily on building a strong culture and establishing high-quality data assets when allocating resources to AI initiatives. Given the results, I inductively develop implications for theory and argue that the emergence of a Data Clan can be a governance mechanism to reduce coordination frictions and build a competitive advantage in the age of AI.In the third essay, I argue that investors require a higher initial return to take on more technology risk disclosure during an IPO. I quantify the magnitude of disclosed risk and the risk disclosure topics based on a latent Dirichlet allocation (LDA) topic model of IPO prospectus text and find a return-for-risk association between text-based technology risk disclosure and underpricing. The study also finds evidence that owning granted patents is associated with a lower return-for-risk association, suggesting that intellectual property allows the disclosure of risk without losing the competitive advantage. I open-source the code for quantifying risk disclosure as RiskyData-LDA on GitHub.In summary, this dissertation develops theory and finds evidence across three essays to argue that leveraging new technologies requires deliberate strategic planning to manage potential downsides of new technologies, such as the opportunity costs of automation, coordination costs, and costs associated with raising capital. The results suggest three mitigating solutions: dynamic routines to balance learning and automation, a Data Clan to improve coordination, and disclosure through patents to reduce underpricing.

EPFL2022

Three Essays on Predictability and Seasonality in the Cross-Section of Stock Returns

Vincent Jean Bogousslavsky

This thesis examines predictability and seasonality in the cross-section of stock returns. The first chapter, titled

Infrequent Rebalancing, Return Autocorrelation, and Seasonality,'' shows that a model of infrequent rebalancing can explain specific predictability patterns in the time series and cross-section of stock returns. First, infrequent rebalancing produces return autocorrelations that are consistent with empirical evidence from intraday returns and new evidence from daily returns. Autocorrelations can switch sign and become positive at the rebalancing horizon. Second, the cross-sectional variance in expected returns is larger when more traders rebalance. This effect generates seasonality in the cross-section of stock returns, which can help explain available empirical evidence. The second chapter, titled

Seasonalities in Anomalies,'' investigates return seasonalities in a set of well-known anomalies in the cross-section of U.S. stocks returns. A January seasonality goes beyond a size effect and strongly affects most anomalies, which can even switch sign in January. Both tax-loss selling and firm size are important in explaining the turn-of-the-year pattern. Return seasonality exists outside of January, with respect to the month of the quarter. Small stocks earn abnormally high average returns on the last day of each quarter, which significantly affects size, idiosyncratic volatility, and illiquidity portfolios. The results have implications for the interpretation and analysis of many anomalies, such as asset growth and momentum. The third chapter, titled ``The Cross-Section of Intraday and Overnight Returns,'' uses a thirty-year sample of U.S. stock returns to document substantial cross-sectional variation in returns over the trading day and overnight. Market closures have a large impact on returns. Small and illiquid stocks earn high average returns in the last thirty minutes of trading. In contrast, large and liquid stocks perform poorly at this time. I find support for institutional and information asymmetry theories. But these theories do not fully explain the cross-sectional evidence. Portfolios based on other characteristics, such as beta and idiosyncratic volatility, earn their return gradually throughout the trading dayâcontrary to the market and a benchmark based on random portfolios. These portfolios also tend to incur large negative returns overnight, consistent with mispricing at the open.

EPFL2017

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In finance, return is a profit on an investment. It comprises any change in value of the investment, and/or cash flows (or securities, or other investments) which the investor receives from that inve

Net present value

The net present value (NPV) or net present worth (NPW) applies to a series of cash flows occurring at different times. The present value of a cash flow depends on the interval of time between now and

Discounted cash flow

The discounted cash flow (DCF) analysis, in finance, is a method used to value a security, project, company, or asset, that incorporates the time value of money. Discounted cash flow analysis is wide