Regulated prices and real options

This paper shows how the cash flows received by an unregulated firm operating in a workably competitive market can be replicated for a regulated firm. The only change to standard regulatory practice is that each time the regulated firm invests, the amount added to its rate base is the product of its capital expenditure and a multiplier, greater than one, that captures the reduction in value of the unregulated firm's growth options that occurs whenever the firm invests. The regulated firm is allowed to earn a rate of return equal to its weighted-average cost of capital, applied to this rate base. Four possible approaches to estimating the size of the multiplier are presented, each based on an established real-options investment model.     

BREAKING DOWN A LONG-RUN MARGINAL COST OF AN LP INVESTMENT MODEL INTO A MARGINAL OPERATING COST AND A MARGINAL EQUIVALENT INVESTMENT COST

In linear programming, a simple observation on duality allows us to break down a long-run marginal cost into a marginal operating cost and a marginal equivalent investment cost. This marginal equivalent investment cost is an acceptable means of allocating the equivalent investment cost to the different finished products (and similarly for the marginal operating cost). It is useful for determining the products on which a sales campaign should focus and for analyzing short-run marginal costs once an investment decision has been taken. As an example, we will examine a simplified investment model in the oil refining industry.     

Further Evidence on the Capital Structure of REITs

This study examines the determinants of real estate investment trust (REIT) capital structure decisions from 1990 to 2008. Using a broad sample of 2,409 firm‐year observations, we find that asset tangibility is positively related to leverage, whereas profitability and market‐to‐book ratios are negatively related. Additional evidence suggests that firm debt capacity varies systematically with the unique operating and financing mechanisms employed by REITs. These results are robust across both aggregate firm debt levels and marginal security issuance decisions. Finally, our results provide further insight into competing capital structure theories, generally supporting empirical predictions derived from the market timing and trade‐off theories, although failing to support pecking order theory predictions.     

Real Estate and Economies of Scale: The Case of REITs

Building on past research in the economies-of-scale debate, we test for scale economies in real estate investment trusts (REITs) by examining growth prospects, revenue and expense measures, profitability ratios, systematic risk and capital costs. Overall, we find that large REITs are increasing growth prospects while succeeding at lowering costs, leading to a direct relationship between firm profitability and firm size. Additionally, we find an inverse relationship between equity betas and firm size, and for all cost of capital measures we find significant scale economies. Further evidence from the stochastic frontier analysis suggests efficiency opportunities appear possible through continued growth and consolidation in REITs.     

The right speed and its value

Slow investments cause substantial revenue losses, yet acceleration increases costs. This tradeoff implies that an optimal investment speed usually exists; it is faster the higher a firm's intrinsic speed capability. We hypothesize that it is a firm's intrinsic speed capability, rather than its speed relative to industry competitors per se, that boosts firm value. Using data on oil and gas facilities (1996–2005), we find that intrinsic speed capabilities augment firm value in a varied way: their value is larger with better corporate governance, lower cost of capital, and higher ability to draw value from R&D investment. Our work elevates the discussion of speed from a project‐level consideration to a firm‐level competitive advantage issue and raises the need to further explore its strategic value. Copyright © 2013 John Wiley & Sons, Ltd.     

企业创新投资决策的资本结构条件

本文专门考察资本结构是否以及如何对企业的创新投资产生影响,这对探寻企业融资与企业产品市场表现之间的关系有非常重要的意义。为此,论文以一个两阶段的最优化模型为分析工具,结果表明：高负债的企业将会做出相对谨慎的创新投资决策,而这会导致它在于对手的“产品差异化”竞争中居于劣势。本文得出这样的结论主要是基于两个前提：一是当企业的经营环境较好时,创新投资的边际收益较低;二是有限责任公司制度下公司对其负债承担有限清偿责任。模型的分析结果与该领域内的经验研究结论是相吻合的。     

Firm Investment Behavior and Collective Bargaining Strategy

Using survey data on labor union coverage at the firm level, this paper examines union-nonunion differences in investment activity among 706 U.S. companies during the 1970s. Consistent with a model of union rent seeking, firm-level collective bargaining is associated with significantly lower physical capital and R&D investment, even after controlling for firm and industry characteristics. Deleterious union effects on investment are considerable throughout the 1972–80 period, but they vary across industries. Without significant changes in collective bargaining power or strategies, diminished investment activity by unionized companies is likely to exacerbate the already considerable decline in U.S. union coverage     

Brokerage commissions and margin requirements: With special reference to Japan

In Japan, brokerage commissions and margin requirements are currently regulated by the Ministry of Finance. However, commissions may soon be deregulated. This paper examines several economic factors which determine commissions and margins in a deregulated environment. The analysis is motivated by the observations that for Japan's securities companies, 1) brokerage commissions constitute a large component of their revenues; 2) margin transactions account for a significant proportion of their trading volume; 3) their gross income exhibits a great deal of volatility; 4) income tax is one of their two largest expenses; and 5) they face a significant tax asymmetry.While executing an unmargined long transaction for a customer is a riskless activity, executing either a margined long or a short transaction exposes the firm to some risk and possibly negative profits. While the commission charged by a brokerage firm for executing a riskless (unmargined) long transaction is simply equal to the marginal cost of producing the firm's total number of transactions, it is demonstrated that the gross commission charged for executing either a margined long or a short transaction includes two other components. The first additional component is a risk/tax premium that is determined by the brokerage firm's tax rate and degree of tax asymmetry, the security's volatility, and the customer's margin deposit. The second additional component is the premium required for the implicit put option associated with a margined long transaction, or for the implicit call option associated with a short transaction. The option falls in-the-money if the security's price changes significantly, so that it is optimal for the customer to default on his contract with the brokerage firm.The determinants of the customer's optimal margin, for both long and short transactions, are also examined. The benefit to the customer of depositing a higher margin is that his commission cost declines. For example, with short transactions a higher margin increases the exercise price of the implicit call option, causing both the risk/tax premium and the implicit option premium to decline. However, a higher margin may increase the customer's opportunity cost of capital. Consequently, the optimal margin increases with the firm's tax rate and degree of tax asymmetry, and decreases with the customer's opportunity cost of capital. An increase in the security's volatility has an ambiguous impact on the optimal margin.The authors are from York University, Canada and International University of Japan, respectively. Part of this paper was written while the first author was on leave at Kyoto University, Japan. We acknowledge helpful comments by Richard Arnott, Lawrence Harris, Hiromitsu Ishi, Eliakim Katz, Johannes Raaballe and Lim Kian Guan (the editor).     

Investments in next generation access infrastructures under regulatory uncertainty

This article studies the impact of regulatory uncertainty on an incumbent’s incentives to undertake the socially optimal investments in NGA networks. Thus, a regulatory non-commitment setting in which the regulator sets the access price after the deployment of the NGA network is used. In particular, it is assumed that the regulator sets the access price at the marginal cost of providing the access with some probability and gives an access markup, which equals the average cost of the investments, with the complementary probability. It is found that when the slope of the marginal investment cost function is not particularly steep in relation to the impact of investments on demand, the incumbent underinvests compared to the socially optimal investment level. On the contrary, in a more realistic case when the impact of investments on demand is low in relation to the slope of the marginal investment cost function, the incumbent may overinvest or underinvest depending on the probability of incorporating an access markup into the access price.     

Finance, Investment and Investment Performance: Evidence from the REIT Sector

We examine financing, investment and investment performance in the equity REIT sector over the 1981–1999 time period. Analysis reveals significant differences between the old-REIT (1981–1992) and new-REIT (1993–1999) eras. The sector experienced rapid growth in the new-REIT era, primarily from firm-level investment as opposed to new entry. Firm-level investment was largely financed by equity and long-term debt, with little reliance on retained earnings. Financing policy stabilized in the new-REIT era, and capital structures became more complex. We find that REITs provided returns over and above their cost of capital, where most of the value-added investment occurred in the new-REIT era by newer firms. Finally, we present novel evidence on IPO activity and new firm investment–investment performance relations that is consistent with Tobin's q theory of investment.     

THE CORRECT SPECIFICATION OF OPPORTUNITY COST IN THE EVALUATION OF BOND ISSUE SIZE AND TIMING

The question of when and in what quantity to obtain required bond financing takes on significance due to fixed flotation coats and the opportunity to invest excess long-term debt in marketable securities. In prior research, the optimal size and timing of bond issues is most often determined as the solution to a cost minimization problem. In this paper, we first demonstrate that previous studies have incorrectly identified the opportunity cost of excess debt. We then delineate the opportunity cost in a form consistent with modern capital structure theory. Our results indicate that a firm's capital structure and marginal tax rate are important determinants of the optimal size and timing of its bond issues.     

The Effects of Local Government Expenditure and Property Taxes on Investment*

The effect of local government property taxes and expenditures on investment in housing and manufacturing plant and equipment is analyzed in theoretic model and tested empirically. An investment model of firm behavior is developed and implications regarding the effects are deduced. These implications are tested in a single equation model of investment in single- and multifamily structures and capital investment in manufacturing in eleven urban cities and their eighty-nine suburbs. Tentative conclusions that additional municipal expenditures increase investment and a higher effective property tax rate diminishes it are supported and that cities have on average exhausted the net benefits of increasing balanced budgets.     

A characterization for the negative welfare effects of cost reduction in Cournot oligopoly

This paper characterizes the welfare effects of cost reductions in a Cournot model with linear costs. Under linear demand, a small reduction in a firm’s marginal cost reduces welfare if and only if its market share is less than 1/(2n+2), or equivalently, its marginal cost exceeds a critical level determined by the market. A large cost reduction by the firm increases welfare if and only if its magnitude is at least twice the difference between the current marginal cost and its critical value. The paper also extends the results to non-linear demand, but the characterizations become less tractable.     

Endogenous location leadership

We analyze a game of timing where Sellers, which have marginal production cost asymmetries, can delay entry and a commitment to a location in a Hotelling type setting. When cost differences are large enough the game becomes a war of attrition that yields Stackelberg behavior where the high cost firm will delay choosing a location until the low cost firm commits to its position. We find interaction effects between timing and the degree of product differentiation and compute timing/location and mixed strategy equilibria through a range of marginal cost differences. The firms maximally differentiate with moderate cost differences; with somewhat greater cost differences there is intermediate differentiation, and; with large cost differences there is a blockading monopoly. The low cost firm always commits to entry immediately whereas the high cost firm either enters immediately, shortly after the low cost leader, or never, depending on the cost differences. Finally, we find that in equilibrium the duopoly is sustained for a larger range of cost differentials and that differentiation is greater than the social optimum.     

An Investment Model of the Demand and Supply For Industrial Real Estate

A recent inventory of industrial building in fifty-two major metropolitan areas of the country indicates that most such space is either owner occupied or single tenant. This suggests that the production of industrial space may be modeled as a firm "investment" decision. Using the completion date of each inventoried building, we construct a time series of plant completions that moves similarly to some other national investment data. We are able to successfully estimate an "accelerator" type model of plant deliveries, driven by movements in employment and the after-tax cost of corporate capital. Our model can be used to estimate a measure of excess plant capacity in the market, and historic values of this measure do move parallel to some recent industrial vacancy data.     

流动资产投资政策与公司绩效关系研究——基于我国生物医药上市公司的实证分析

营运资本管理包括营运资本投资管理和筹资管理,而营运资本投资管理的重要内容之一是流动资产投资政策的制定。本文在进行流动资产投资政策与公司绩效的理论分析基础上,选取我国医药业上市公司2001～2010年74家面板数据,采用分位数回归检验流动资产投资政策对营运效率不同的公司绩效的影响,结果表明流动资产收入比对企业经营绩效产生负向影响,对营运效率越高的企业影响越显著。在此基础上,对于如何采取合理的流动资产投资政策提出了对策建议。     

On the comparative statics of the dominant-firm model

This paper examines the effect of a change in demand upon a dominant firm's share of the market. The direction of change in market share is not readily determined in the general form of the model. It depends upon the values of a number of parameters. In the linear and log-linear forms of the model, however, the number of crucial parameters reduces to two. The market share of the dominant firm varies directly (inversely) with demand when the y-intercept of its marginal cost curve is greater (less) than the y-intercept of the supply curve of the fringe in the linear model and, in the log-linear model, when the elasticity of marginal cost with respect to output is less (greater) for the dominant firm than it is for the fringe.     

市场一体化、企业异质性与地区补贴——一个解释中国地区差距的新视角

本文基于融入异质性企业理论的经济地理分析框架,通过引入地区补贴行为对基础模型进行扩展,揭示中国市场一体化进程与区域协调政策影响地区生产率差异和地区经济差距的另一重要机制,即:市场融合过程中,异质性企业的定位选择行为会加剧地区之间的不平衡,并对地区生产率差异产生重要影响,这是不同于规模报酬递增与循环累积效应的另一种机制,能够在一定程度上解释中国旨在缩小地区差距的区域政策效果不理想的原因。进一步研究表明,欠发达地区的补贴政策总是倾向于吸引低效率企业的进入,虽然能缩小地区之间的经济差距,但是会扩大地区之间的生产率差异,不利于欠发达地区的可持续发展。本文的研究,在一定程度上解释了中国市场一体化的背景下,随着近年来区域政策力度明显加强,地区差距缩小和地区生产率差距扩大的原因。本文的研究还表明,合意的区域政策是加快市场一体化进程,同时对于欠发达地区提供适度支持政策。     

Measuring and Utilizing Corporate Risk Tolerance to Improve Investment Decision Making

Strategic investment decisions are generally characterized by financial risk as well as an irrevocable commitment of significant amounts of capital. The firm's willingness to undertake financial risks plays an important role in the investment decision making process. A comprehensive economic decision analysis to evaluate strategic investment decisions requires a measure of the firm's tolerance for financial risk. This article describes a decision analysis–based technique for assessing managerial risk tolerance as well as managers' ability to be consistent in terms of their financial risk taking. These assessments are then utilized to assist the firm in establishing a corporate risk policy that can guide strategic decisions under uncertainty. The study firm is a business unit within a U.S.-based major oil company with an annual capital budget of approximately $400 million. Our findings suggest that managers are generally risk averse but struggle in terms of being consistent in their financial risk-taking decisions. This work enabled the firm to implement a financial risk tolerance that could be utilized in the economic decision analysis of investment decisions.     

Corporate capital allocation: a behavioral perspective

Previous research on capital investment has identified a tendency in multibusiness firms toward cross‐subsidization from well‐performing to poorly performing divisions, a phenomenon that has previously been attributed to principal‐agent conflicts between headquarters and divisions (Stein, 2003 ). In this paper, we argue that cross‐subsidization reflects a more general tendency toward even allocation over all divisions in multibusiness firms that is driven, at least in part, by the cognitive tendency to naïvely diversify when making investment decisions (Benartzi and Thaler, 2001 ). We observe that this tendency also leads to partition dependence in which capital allocations vary systematically with the divisions and subdivisions into which the firm is organized or over which capital is allocated. Our first study uses archival data to show that firms' internal capital allocations are biased toward equality over the number of business units into which the firm is partitioned. Two further experimental studies of experienced managers examine whether this bias persists when participants are asked to allocate capital to various divisions of a hypothetical firm. This methodology eliminates the possibility of agency conflicts. Nevertheless, allocations varied systematically with the divisional and subdivisional structure of the firm and with a centralized or decentralized capital allocation manner. Copyright © 2011 John Wiley & Sons, Ltd.