The equity premium puzzle and its implications for public infrastructure financing

Mr James Green (2010). The equity premium puzzle and its implications for public infrastructure financing Honours Thesis, School of Economics, The University of Queensland.

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Author Mr James Green
Thesis Title The equity premium puzzle and its implications for public infrastructure financing
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2010
Thesis type Honours Thesis
Supervisor Professor John Quiggin
Total pages 128
Language eng
Subjects 14 Economics
Abstract/Summary This thesis examines the financing and construction arrangements of the recently designed Airport Link project in Brisbane, Australia. The central hypothesis of the thesis is that the equity risk premium, combined with the public nature of toll roads, makes private financing of this kind of public infrastructure undesirable. It attempts to test this hypothesis by valuing the project under standard CAPM and WACC frameworks, and then modelling the sensitivity of the project’s value to different assumptions regarding traffic flows, inflation, asset risk, and errors in operating-cost forecasts. The results show that with large equity contributions the project is inherently unstable and given the finance structure, was always susceptible to a downward price spiral of the type observed. The thesis then models the project value under a public finance option and concludes that this is a more beneficial option for investors, the government, and the community alike.
Keyword Equity Premium Puzzle
Public finance
Public Private Partnerships

Document type: Thesis
Collection: UQ Theses Collection (non-RHD) - Open Access
 
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Created: Tue, 24 Aug 2010, 21:38:30 EST by Mr James Green on behalf of The University of Queensland Library