AN ANALYSIS OF REGULATED RATES OF RETURN FOR WHOLLY OWNED SUBSIDIARIES

Two methods are used by public utility regulators to set the allowed rate of return to a wholly owned subsidiary: the “independent firm” approach and the “double leverage” approach. Neither approach is consistent with any existing theory of firm valuation. The contribution of this paper is to derive from standard valuation theory a “divisional cost of capital” specification of the allowed rate of return to a wholly owned subsidiary. On the basis of this specification it is shown that the independent firm approach allows shareholders to capture the value created by the interest tax savings on parent debt. It is also reconfirmed that the double leverage approach induces cross-subsidization since it allows each subsidiary to earn the same rate of return on equity regardless of the level of risk specific to the subsidiary.     

FLATTENING OF BOND YIELD CURVES

Putting no restrictions on forward interest rates, earlier research has shown that yield curves for coupon-bearing bonds will become flat for long maturities. This paper shows that weak restrictions on forward rates imply flattening of bond yield curves for maturities of 10 to 15 years.     

Services in the new industrial economy

‘Manufacturing matters’,¹ but ‘So do services’. The future of industrialization is the future of both these increasingly intertwined and interdependent activities. Rather than a post-industrial society, we are seeing a new mode of industrialization encompassing and integrating manufacturing and services. This article considers the prospects for services in the new industrial economy,² focusing on innovation in services. Services have frequently been considered to be relatively poor in economic performance. However, regarding services as laggards is decreasingly useful when considering contemporary services, many of which are the major users, carriers and promoters of many classes of innovative hardware. New services (such as software and telematics) are performing vital roles in the diffusion of new technologies, techniques and organizational styles. This article outlines some trends in the service economy, examines the special nature of services, considers how services are changing their products and processes, and assesses emerging strategies for organization and trade in services.     

The effects of risk and return on the currency composition of money demand

Zusammenfassung Die Wirkungen von Risiko und Ertrag auf die W?hrungszusammensetzung der Geldnachfrage. — In diesem Aufsatz wird ein theoretisches Modell einer variablen W?hrungszusammensetzung der Geldnachfrage entwickelt, das auf dem Maximierungsverhalten und einer Geld-Produktionsfunktion basiert und Wechselkursunsicherheit einschlie\t. Ein empirischer Test des Modells zeigt, da\ es eine solche Portfolio-Diversifikation auf den internationalen Geldm?rkten gibt. In den Vereinigten Staaten beeinflu\t die Unsicherheit über den Wechselkurs die Zusammensetzung der Geldbest?nde statistisch in der erwarteten Richtung. Obwohl die Ergebnisse für Deutschland statistisch kaum signifikant sind, haben die Reaktionen doch das richtige Vorzeichen. Diese Ergebnisse legen es nahe, die Diversifikationswirkungen in die Theorie von den Anpassungsprozessen der internationalen Geldm?rkte einzubauen.

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Résumé Les effets de risque et de rendement sur la composition de monnaie de la demande monétaire. — Dans cet article nous avons développé un modèle théorique de la composition variable de monnaie de la demande monétaire qui se fonde sur le comportement de maximiser et sur une fonction de la production monétaire et qui incorpore l’incertitude sur le taux de change. Un test empirique du modèle démontre une évidence concrète d’une telle diversification du portefeuille de monnaie sur les marchés internationaux monétaires. L’incertitude sur le taux de change influence statistiquement fort les dispositions monétaires de la direction anticipée dans les états-Unis. Bien que les résultats pour l’Allemagne ne soient statistiquement significatifs que marginalement, la direction de la réponse a aussi le propre signe. Les résultats impliquent que ces effets de diversification devraient être incorporés dans la théorie d’ajustement des marchés internationaux monétaires.

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Resumen Los efectos del riesgo y del retorno sobre la composición monetaria de la demanda por dinero. — En este artículo hemos desarrollado un modelo teorético de una composición monetaria variable de la demanda por dinero, basada en el comportamiento maximizador y en una función de producción del dinero e introduciendo incertidumbre de tasa cambiaria. Un test empírico del modelo provee evidencia concreta de tal diversificación del portafolio de dinero en los mercados monetarios internacionales. Incertidumbre de tasa de cambio afecta la tenencia relativa de dinero con un efecto estadístico fuerte de la dirección anticipada en los EE.UU. A pesar de que los resultados para Alemania son estadísticamente solo marginalmente significantes, la dirección de la respuesta tiene nuevamente el signo correcto. Estos resultados implican, por lo tanto, que estos efectos de diversificación deberían ser incorporados en la teoría del ajuste de mercados monetarios internacionales.

     

Incomplete contracts and the make or buy decision: Governance design and attainable flexibility

A common recommendation by management advisors is for organizations to adopt procedures which facilitate the forming of close cooperative working relationships with subcontractors. A central theme of this research is to explore why such issues are being emphasized at this time and then to indicate how accounting systems can give rise to powerful countervailing incentives which stifle attempts to work cooperatively. In order to address this problem it is proposed that modification be made to the orthodox computational philosophy, embedded in the traditional accounting make or buy decision calculus. To illustrate the basis for the modification argument, a review of Japanese subcontracting practices is presented. Such practices have relevance since the recent Japanese manufacturing pre-eminence, can in part, be attributed to the institution of effective motivational and control structures for subcontractors. A discussion is presented of how these structures promote rapid flexible technological transfer and sharing between a network of subcontractors and an assembler. The incentives associated with these governance structures are shown to differ markedly from those under traditional make or buy procedures. In the process of developing modification proposals, it is shown that if an assembler is to gain from increased flexibility in the production relationship with a subcontractor this simultaneously requires reduced flexibility in choice over forming competing relationships. Thus it is argued that a search for possibilities of increased overall flexibility needs to be understood within a more naunced comparative sense. This in turn gives rise to important new implications for the focus of accounting calculus. Moreover it is argued that borders between the practices of control and of consultative guidance become less clear, which in turn also has implications for the focus.     

Effacing the political future : A response to

Political change within industrial countries will accompany the restructuring of economies and international relations in the 1980s. The most detailed study of alternative scenarios involving the latter issues—the report—treats domestic politics in terms of notions of value change. This article criticises these widespread ideas. Futures studies need to take political trends seriously, including those towards corporatism and the strong state. In this light the development of the informal sector can be no panacea for problems of political and economic power.