Working papers – 2021

The CICEE working papers series is in digital format only (PDF), with Professor João Ribeiro being the Coordinator responsible for receiving, attributing DOI and uploading the working papers.

The publication of working papers by (co)authored by CICEE guest researchers is dependent on their prior acceptance at a conference with acceptance with peer review.
The publication of working papers by the (co)authorship of permanent researchers of CICEE, is carried out after a joint favorable opinion of the Coordinator of the working paper series and a permanent researcher of the Center appointed by the Board of CICEE.
The publication of working papers by researchers outside the CICEE is dependent on the prior holding of a seminar within the scope of the CICEE research seminar cycle.

008 – Corporate Financing Choices after the 2007-2008 Financial Crisis 

João Pinto & Mário Coutinho dos Santos

We study the factors that, arguably, affect the probability of a new borrower choosing between structured finance (SF), either project finance (PF) loans or asset securitization (AS) bonds, and straight debt finance (SDF) – corporate bonds (CB) – transactions using a large cross section of 24,435 Western European loans and bonds issued between January 1st, 2000 and December 31st, 2011. Borrowers chose an SF transaction when they seek long-term financing and when they operate in a country with lower sovereign rating. Findings suggest that industrials, utilities, transportation, and governmental borrowers exhibit a higher likelihood of an SF transaction, more specifically, a PF transaction. Several macroeconomic factors, like market interest rate levels and volatility, and the slope of the Euro swap curve, positively influence the probability of observing an SF over an SDF transaction. The 2007-2008 financial crisis and the subsequent European sovereign debt crisis have a significant impact on the financing choice, decreasing the probability of observing an AS transaction. During the financial crisis, macroeconomic factors seem to significantly influence the probability of a sponsor to choose SF over SDF. We also find that credit spreads and loan to value ratios have a significant negative relationship for AS bonds. Overall, findings are in line with security design literature. SF transactions or instruments, based on extensively contractual and security design, allow the reduction of the net costs associated with asymmetric information and agency conflicts.

007 – The Role of the Abandonment Option in Strategic Resource Allocation: A Selected Review of the Literature 

João A. Ribeiro and João Costa-Filho

We review the most relevant contributions to the abandonment option since the late 1960’s. We begin by approaching the contributions to the literature before the emergence of the real options approach to capital investment decisions, and after, under a consistent real options approach, underlining the interactions between the option to abandon and other types of options. We move on to identify the methodologies adopted, and the business sectors/ types of investment projects where the abandonment option is more frequently studied. We also debate the strategic role of the abandonment solution in corporate divestitures and under a game-theoretical approach. Finally, we present some concluding remarks and propose how certain gaps found in the literature may constitute opportunities for future research.

006 – A Real Options Model to Determine the Optimal Contractual Penalty for a BOT Project

João A. Ribeiro, Paulo J. Pereira & Elísio M. Brandão

Public-Private Partnerships (PPP) became one of the most common types of public procurement arrangements and Build-Own-Transfer (BOT) projects, awarded through adequate bidding competitions, have been increasingly promoted by governments. The theoretical model herein proposed is based on a contractual framework where the government grants leeway to the private entity regarding the timing for project implementation. However, the government is aware that delaying the beginning of operations will lead to the emergence of social costs, i.e., the costs that result from the corresponding loss of social welfare. This fact should motivate the government to include a contractual penalty in case the private firm does not implement the project immediately. The government also recognizes that the private entity is more efficient in constructing the project facility and also in running the subsequent operations. The model’s outcome is the optimal value for the legal penalty the government should include in the contract form. Sensitivity analysis reveals that there is a level for each of the comparative efficiency factors above which there is no need to impose a contractual penalty, for a given level of social costs. Finally, the effects of including a non-optimal penalty value in the contract form, which derives from overestimating or underestimating the selected bidder’s real comparative efficiency are examined, using a numerical example. Results demonstrate that overestimating (underestimating) the selected bidder’s real comparative efficiency leads to the inclusion of a below-optimal (above-optimal) value for the legal penalty in the contract and produces effects the government should prevent by estimating the comparative efficiency factors with full accuracy.

005-Savings and Financial Literacy: A Brief Review of Selected Literature

Ana Brochado & Victor Mendes

This paper presents a systematic review of the literature on financial literacy and savings. A total of 183 articles published between 2005 and 2019 were analysed. The review relied on hybrid methods, namely, descriptive, semantic network and narrative analyses. The lexical analysis of the articles’ abstracts identified 11 themes: financial literacy, financial literacy measurement, correlates, savings, savings type, financial education, target group, theories, personal finance, financial preparation and financial inclusion. The findings include avenues for future research.

004-Contracting Out Public Transit Services: A Competitive Performance-Based Approach

João M. Pinto, Mário Coutinho dos Santos & Pedro Verga Matos

This paper develops a bonus / malus incentive model to contracting out public transit services, and provides evidence on performance measures of a light-rail transit system operation, procured with a contract designed based on our modeling approach. Empirical results document that the implementation of a performance-based contract with an embedded incentive bonus / malus mechanism, may contribute to promote ridership patronage, increase the average ride, and ultimately significantly improving the overall economic operating efficiency of the system, measured by a 40 percent increase in the operating costs coverage ratio during the contract term.

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