The business world will have a better method of evaluating big investment projects and meeting required returns, if Dr Maosen Zhong has his way.
For the next two years, the senior lecturer from The University of Queensland's Business School will come up with a step-by-step formula to predict equity capital – the amount a company’s shareholders invest in their company.
He said the results would help financial managers and treasury staff evaluate investments such as new offices or factories and would help stock investors meet required returns on their investments.
Dr Zhong has received $75,000 from UQ’s Research Excellence Awards to fund his project titled, The Investor Recognition Hypothesis and Asset Pricing Under Habit Formation.
“I hope to have a theoretically better formula where you can plunk in some numbers and the result will be the estimated cost of capital,” Dr Zhong said.
It will give a precise cost of equity which can be used to evaluate cash flow from investment projects.
Dr Zhong will test a business theory called the investor recognition theory, and if supported, will plug that theory into a new asset pricing model which estimates expected returns.
He will then test his formula on massive databases of international and Australian stock data to ensure it is practical.
“Currently, the most popular model used to evaluate investment projects’ required returns is the Capital Asset Pricing Model (CAPM),” he said.
“Empirical studies have shown that they are inaccurate. The underlying assumptions of the CAPM are not realistic.”
The 31-year-old said his research would be vital for corporate and government managers because the cost of capital was often the most important part of any decision.
He said his formula had to be tested in real-world conditions before it could help bureaucrats or company executives from making bad investments.
The award money will pay for a PhD scholar, and a part-time research assistant and programmer to help him during the two-year project. It will also pay for a computer, databases, statistical software and travel costs for conferences and work in the United States and Hong Kong.
UQ Business School head and Professor of Finance Tim Brailsford said the asset pricing model underpinned much of corporate finance and approaches by fund managers.
“As financial markets struggle to be understood by a range of commentators, a comprehensive and more refined model is both timely and important.”
An assessment of Dr Zhong’s project said it was ambitious but could improve the understanding of national and international markets.
“For me it’s a challenge but definitely achievable,” Dr Zhong said.
Media: For more information contact Dr Zhong (telephone 07 3365 6181 or email: m.zhong@business.uq.edu.au) or Miguel Holland at UQ Communications (telephone 07 3365 2619, email: m.holland@uq.edu.au). Videos and still photos are available at www.uq.edu.au/news/researchweek
.jpg)
