Four Essays on Investment

Abstract

Investment decisions lie at the heart of many economic activities. Each day, individual investors, banks, and fund management firms try to optimize their portfolio investments at international financial markets around the globe. Corporations buy parts of other corporations or sell divisions of their own activities in the worldwide mergers and acquisitions market in order to adjust the strategic direction of their business model. On the other hand, firms face constantly the challenge to determine their optimal investments into new factories, marketing strategies, or fundamental research activities.<br /> Many of these investment decisions are rather complex. Usually, they involve complicated considerations on expected gains out of the transaction as well as a thorough analysis of the risk related to the investment. Hence, a sound investment evaluation is the prerequisite for any sound investment decision. Financial economics has developed numerous theoretical models as well as an abundance of empirical studies that aim to assess investment opportunities and thereby try to explain investment decisions.<br /> This dissertation sheds light on several important aspects of investment evaluation and investment decisions. Throughout this work, I use both empirical analysis as well as theoretical models to introduce some new features into well-known topics in empirical asset pricing and the theory of optimal investment decisions. In the first three chapters I concentrate on issues surrounding investments in financial markets. First, I compare various novel approaches to estimate the equity risk premium, one of the key variables in investment theory. In the next chapter, I analyze whether it is possible to generate excess returns in equity markets by investing into stock on the basis of publicly available information in form of analysts' forecasts. In chapter three, I test whether these analysts' forecasts can also be used to predict stock returns. In the fourth chapter then, I shift the analysis towards corporate investment decisions in the real economy. More precisely, I examine how a decision maker's attitude towards uncertainty affects the investment behavior of firms.