
54 ISE Magazine | www.iise.org/ISEmagazine
research
Bandwagon investment equilibrium
of investment timing games
Under stochastic and competitive environments, irreversible
investment timing is an essential yet delicate strategic decision.
Although the investment timing decision is complicated, it is
evident that excessive industry capacity caused by simultane-
ous investment is undesirable to every investor. However, con-
current investments are frequently observed, and some of the
simultaneous investments are even voluntary.
Kihyung Kim and Abhijit V. Deshmukh, authors of the
article, “Technical note: Bandwagon Investment Equilib-
rium of Investment Timing Games,” call the voluntary and
simultaneous investment “bandwagon investment.” Is simul-
taneous investment unreasonable? Under what circumstanc-
es are rational investors on the investment bandwagon? This
research answers these questions.
To find the answers, the article modeled the investment
problem as an option exercise game that integrates game
theory and real options. This research contributes to the
literature in option exercise games by elucidating closed-
loop equilibrium where firms voluntarily invest at the same
time. The results showed that investors are on the investment
bandwagon when they expand their current capacities and
the second mover’s additional profit rate exceeds a threshold
value. Otherwise, investors invest sequentially. This result
explains the frequently observed investment herd effect.
Their work provides interesting implications about the
impact of the COVID-19 pandemic on capital investment.
For an investment opportunity that is expected to be profit-
able but risky, bandwagon investment is more likely to hap-
pen as the uncertainty about the investment return increases
with other conditions remaining the same. On the other
hand, increasing the discount rate reduces the incentive to be
on the investment bandwagon.
Therefore, the uncertainty increased by the COVID-19
pandemic can result in overcapacity caused by bandwagon
investment, but the inflation, which is affected by the stimu-
lus aid and aggressive fiscal policy of governments, makes
sequential investment rather than bandwagon investment
more likely.
CONTACT: Kihyung Kim, assistant teaching professor; kimkihy@missouri.
edu; Department of Management, Trulaske College of Business, University
of Missouri, Columbia, MO 65211
Internal rates of return and
shareholder value creation
Industrial practitioners often use accounting rates of return
for assessing a project’s or firm’s economic efficiency and
for investment decision-making. However, they are warned
by accounting and finance scholars that it is not possible to
correctly infer economic profitability from an accounting
rate.
Building upon his recently conceived accounting-and-
finance engineering system, described in “Investment De-
cisions and the Logic of Valuation” (Springer Nature 2020),
Carlo Alberto Magni overturns these scholars’ arguments in
the paper “Internal Rates of Return and Shareholder Value
Creation.” He demonstrates that such well-known rates as
the return on investment (ROI) and the return on equity
(ROE) provide precise information on economic profit-
ability and give rise to correct investment decision criteria.
Specifically, considering a project or a firm, the average ROI
(ratio of total after-tax operating profits to total capital in-
vested) captures the project’s or firm’s economic profitability,
when compared with the weighted average cost of capital
(WACC), suitably adjusted with the project’s market-to-
book ratio.
Analogously, the average ROE (ratio of total net income
to total equity) captures shareholder value creation and mea-
sures the efficiency of the shareholders’ investment, when
compared with the cost of equity, suitably adjusted with the
corresponding market value-to-book ratio.
As opposed to the traditional internal-rate-of-return ap-
proach, this accounting approach offers practitioners several
favorable features where the average ROI and ROE:
• Are intuitive and simple to calculate.
• Exist and are unique.
• Are explicitly based on the forecasts of revenues and costs
made by the analyst.
• May be employed with time-varying costs of capital.
• Are genuinely internal metrics, in the sense that their cal-
culation and their financial nature (investment rate versus
financing rate) do not depend on the cost of capital.
• Are based on the accounting metrics that are universally
employed in any firm for measuring periodic perfor-
mance (and, as such, they link periodic performance with
multiperiod performance).
• Are net-present-value consistent and therefore link ac-
counting with finance for engineering decision-making.
Furthermore, the average ROI is equal to the book-value-
Kihyung Kim Abhijit V. Deshmukh