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J. Poterba, L. Summers (1995)
A CEO Survey of U.S. Companies' Time Horizons and Hurdle RatesSloan Management Review, 37
Javier García-Sánchez, Lorenzo Preve, Virginia Sarria-Allende (2010)
Valuation in Emerging Markets: A Simulation ApproachWiley-Blackwell: Journal of Applied Corporate Finance
(2011)
Information for Subscribers Journal of Applied Corporate Finance is published in four issues per year. Institutional subscription prices for
(2006)
Political Turmoil and Mexico’s Economy, Working Knowledge,
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Louis Wells, E. Gleason (1995)
Is foreign infrastructure investment still riskyLong Range Planning, 6
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Aileen Stockburger (2007)
Discount Rates in Emerging Markets : Four Models and An Application
B. Esty (2000)
Financing the Mozal Project
R. Vernon (1971)
Sovereignty at bay: The multinational spread of U.S. enterprises
(2010)
Venezuela seen Paying Price for Chavez Expropriation of Oil Contractors,
(2011)
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In theory, political risk is project‐specific and should be accounted for in the estimation of the expected investment cash flows. But in practice, the political risk associated with this type of investment is typically accounted for implicitly by adjusting the investment's required rate of return or the discount rate. As the authors discuss in the article, this approach disguises the specific assumptions being made about the risk of expropriation and so makes it difficult to assess this risk properly. While defending some aspects of current practice, the authors argue that corporate executives should consider some changes. For example, although a project analysis that is shared with the host government could incorporate a risk adjustment to the discount rate, the authors suggest that more explicit analysis of the anticipated risk of expropriation should be incorporated into the analysis of expected project cash flows. This analysis could involve making specific assumptions about the “term structure” of expropriation risk over the life of the investment. Finally, the authors note that the political risk of making investments in emerging economies can be managed to some extent. Investments can be structured in ways that reduce political risk by structuring project cash flows in ways that better align the incentives of the project sponsor and the government of the host country.
Journal of Applied Corporate Finance – Wiley
Published: Jun 1, 2011
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