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This article investigates Granger causality between exchange rates and prices for the US and four of its trading partners: Canada, Germany, Japan and the UK. We emphasize the distinction between direct and indirect Granger causality: exchange rates directly cause prices if movements in exchange rates lead movement in prices, and exchange rates indirectly cause prices if deviations from the Purchasing Power Parity (PPP) condition can help forecast movement in prices. But only by including the interest-rate differential in our error correction model do we obtain results that align with economic theory. The economic theory of PPP suggests that exchange rates and prices are cointegrated, with exchange rates moving proportionally to prices in the long run. In general, we find either direct or indirect feedback mechanisms between exchange rates and prices.

PurposeThis article proposes an evaluation of capital investments that accounts for not only the initial assets, but also any potential growth options.Design/methodology/approachUsing a piecewise linear approximation, a robust valuation technique is demonstrated for analyzing capital investment opportunities containing expansion options in a finite time horizon.FindingsThis process not only recognizes the option‐like characteristics of the initial investment opportunity, but also recognizes the option‐creating characteristics of the investment. This analysis shows that the value of capacity expansion options created by the initial investment has different dynamic characteristics from the assets in place. Although the growth options do not appear in the early investment premium, its impact on the investment decision is embedded in the investment threshold. When the time to expiration is short and the cost to delaying the assets in place is low, this analysis suggests that the initial investment decision might be made by ignoring the growth options.Originality/valueThis real option methodology provides a continuous solution to the optimal investment threshold and is a viable alternative to the traditional finite difference approach.

Prior research shows that short-sale restrictions during an IPO lead to higher aftermarket prices. Using this and heterogeneous expectations on the factor pricing coefficient, our model sheds additional light on the impact of the short-selling constraint. Like prior research, shortsale restrictions in the IPO market lead to higher aftermarket prices. Importantly, our model predicts that this constraint leads to a different factor pricing coefficient than the analog under complete markets. Our empirical tests over an extended period of time support the model's predictions.