Idiosyncratic risk and financial policy

In economies subject to uninsurable idiosyncratic risks, competitive equilibrium allocations are constrained inefficient: reallocations of assets support Pareto superior allocations. This is the case even if the asset market for the allocation of aggregate risks is complete.     

Idiosyncratic risk and aggregate employment dynamics

This paper studies how idiosyncratic productivity risk impacts aggregate employment dynamics when there is a trade-off between workers' productivity and costs of job creation and destruction. In our analysis, increasing idiosyncratic risk induces a producer to move workers out of structured jobs that are costly to create and destroy and towards less productive but more flexible unstructured positions. This substitution leaves the producer's total employment more responsive to both idiosyncratic and aggregate disturbances. If all of an industry's producers respond to heightened idiosyncratic risk in this way, then industry-wide employment can respond more to a given aggregate shock. We apply this insight to connect differences between young and old manufacturing plants' aggregate employment dynamics with their corresponding differences in idiosyncratic variability.     

Market structure and the cost of capital

We contribute to the finance literature in two main ways. First, we present a theoretical capital asset pricing model (CAPM) to price assets in different market structures. Second, we use our model to analyze whether when markets are partially segmented using the local or the global CAPM yields significant errors in the estimation of the cost of capital for a sample of firms from developed and emerging countries.     

The cost of equity capital: A simplification

Modigliani-Miller's theorem, which asserts that corporate financing policy is of no consequence, has been shown to hold true under a set of assumptions which is less restrictive than the original set used by MM. Preceding proofs were based on the theory of general equilibrium. Basically, this paper examines MM's second proposition—the linearity of the cost of equity capital with respect to financial leverage—when dropping a few of their basic assumptions but retaining their assumption about incomplete markets. In particular, this paper relaxes the assumptions that (a) the inflows are perpetual and that (b) the firm's future returns belong to the same risk class. The results of the analysis indicate that the linearity will be sustained. The nature of the financial risk premium (the slope), however, has to be modified.     

Investment coordination in network industries: the case of electricity grid and electricity generation

Liberalization of network industries frequently separates the network from the other parts of the industry. This is important in particular for the electricity industry where private firms invest into generation facilities, while network investments usually are controlled by regulators. We discuss two regulatory regimes. First, the regulator can only decide on the network extension. Second, she can additionally use a “capacity market” with payments contingent on private generation investment. For the first case, we find that even absent asymmetric information, a lack of regulatory commitment can cause inefficiently high or inefficiently low investments. For the second case, we develop a standard handicap auction which implements the first best under asymmetric information if there are no shadow costs of public funds. With shadow costs, no simple mechanism can implement the second best outcome.     

巴塞尔新资本协议框架下的操作风险衡量与资本金约束

操作风险已经成为全球银行业风险管理日益重要的领域之一。将信用风险、市场风险和操作风险合并起来考虑已成为国际范围内风险管理的一种趋势。在近年来国际金融界越来越重视操作风险管理的基础上,巴塞尔新资本协议率先将操作风险纳入风险管理框架中,并要求金融机构为操作风险配置相应的资本金。操作风险管理的突显,使金融机构面临新的压力与挑战。     

Corporate tax avoidance and cost of equity capital: international evidence

ABSTRACT

This study examines the association between firm’s tax avoidance activities and cost of equity capital across 17 countries. Consistent with the prior study based on the U.S. evidence, within strong investor protection countries, the extent of firm’s tax avoidance is negatively associated with its cost of equity capital. This result indicates that strong investor protection induces investors to perceive firm’s tax avoidance activities as the results of efficient tax planning to reduce tax liabilities. To the contrary, we find that the extent of firm’s tax avoidance is positively associated with its cost of equity capital within weak investor protection countries. This result suggests that investors impose equity risk premium on firm’s tax avoidance activities in weak investor protection countries, where agency conflicts prevail more on firm’s tax avoidance activities. As the first international study on the association between firm’s tax avoidance activities and its cost of equity capital, this study contributes to the literature by suggesting that such an association may vary across countries depending on the strength of investor protection within each country of domicile.     

Franchising,agency problems,and the cost of capital

Explanations for franchising are examined in the context of the US hotel industry. The study is distinct from previous research on franchising because it explicitly recognizes the existence of three organizational forms, whereas previous research has focused exclusively on two of these three forms. The two organizational forms examined in previous work are franchising and company ownership. The additional organizational form is company-management/investor-ownership, which involves management by the franchisor and ownership by outside investor groups. A plausible explanation for the existence of the last organizational form is based on the availability of low cost capital from non-chain sources.     

Taxation,corporate financial policy,and the cost of capital: A comment

Theoretical models of the incidence of the corporate profits tax differ as to whether the tax distorts the allocation of resources, or is a lump-sum tax on the owners of capital. These differences derive from the assumptions made about the special provisions of the tax system with regard to the deduction of interest payments and investment expenditure. Two non-distortionary systems are identified which are shown to be equivalent to a capital levy when the tax is introduced and a zero tax on profits. Under the present UK system, however, a higher rate of corporation tax stimulates investment.     

Fixed capital cost,depreciation multiplier and the rate of interest

Suppose in an economy with zero interest rate five new trucks are bought and afterwards the fleet is renewed by investing the annual depreciation quotas. The service life of a truck is four years. What will be the stationary size of the fleet? The assumed answer is four trucks. The correct answer is eight trucks. The difference is measured by a coefficient called depreciation multiplier. The value of the depreciation multiplier is examined for three typical time profiles of fixed assets, and its limits are found to be 1 ?μ?2. It is then shown how the rate of interest can be interpreted as a rate of growth in an economy with unchanged technology. If the rate of interest is made equal to the rate of growth of the economy, the ratio of discounted values of brand new fixed assets and fixed assets of balanced age-distribution is equal to the ratio between gross and net capital in the growing economy with no interest rate.     

Intraday hedging with financial options: the case of electricity

As market intermediaries, electricity suppliers purchase electricity from the wholesale market or self-generate to deliver their customers. However, electricity suppliers are uncertain about how much electricity their residential customers will use at any hour of the day until they actually turn switches on. While demand uncertainty is a common feature of all commodity markets, suppliers generally rely on storage to manage it. Singularly, electricity suppliers are exposed to joint volumetric and price risk on an hourly basis given the physical attributes of electricity. In the literature on electricity markets, few articles compare the efficiency of forward contracts, options and physical assets (i.e. power plants) within intraday hourly hedging portfolios, whereas electricity markets are precisely hourly markets. We analyse portfolios made of forwards, options and/or power plants for specific hourly clusters (9 am, 12 pm, 18 pm, 9 pm) based on electricity market data from 2013 to 2015 from the integrated German–Austrian spot market. Through a VaR model, we prove that intraday hedging with forwards is structurally inefficient compared to financial options and physical assets, no matter the cluster hour. Moreover, our results demonstrate the contribution of ‘out of the money’ options for all hours within volatile spot markets.     

Statistical cost analysis: the hospital case

Cross-section estimates of 31 countries for the year 2000 are used to examine the effect of the level of female education, and the gap between male and female levels, on the prevalence of HIV/AIDS in Sub-Saharan Africa. Many standard types of education are analysed and a non-standard category involving under- and over-aged primary school enrollees are identified. Although it is found that female education is positively related to country infection rates, there is scope to reduce infection rates by substituting one type of education for another. It is estimated that female infection rates peak within 15–17 years of the first case reported.     

On the theory of the firm under uncertainty and the cost of capital

The interaction between the firm's productive behavior under uncertainty and its cost of capital is shown to affect its optimal output. The source of this interaction is linked to the firm's degree of operating leverage.     

Mean-semivariance behavior: Downside risk and capital asset pricing

For over 30 years academics and practitioners have been debating the merits of the CAPM. One of the characteristics of this model is that it measures risk by beta, which follows from an equilibrium in which investors display mean-variance behavior. In that framework, risk is assessed by the variance of returns, a questionable and restrictive measure of risk. The semivariance of returns is a more plausible measure of risk and can be used to generate an alternative behavioral hypothesis, mean-semivariance behavior; an alternative measure of risk for diversified investors, the downside beta; and an alternative pricing model based on this downside beta. The empirical evidence discussed in this article for the entire MSCI database of developed and emerging markets clearly supports the downside beta and the pricing model based on it over beta and the CAPM.     

The cost of capital for a multinational corporation

Evaluating foreign investments requires as inputs the costs of various sources of financing. A multinational firm could raise both debt and equity in capital markets located in different countries. This paper derives the required rates of return for a foreign investment from: domestic bonds, domestic equity, foreign bonds and foreign equity from both the domestic and foreign investors' perspectives. These required returns serve as the basic components in the calculation of the weighted cost of capital for a foreign project.     

Corporate income tax,investment grants,and the cost of capital

While the influence of the corporate tax system on the cost of capital faced by firms in the corporate sector has been studied extensively, these studies generally assume that government intervention is restricted to alterations in the rates and deductibility allowances of the corporate income tax. In this paper the case where government intervention also includes the payment of investment grants to the corporate sector is considered; it is shown that the interactions between the corporate tax system and the grant structure are crucial in determiningthe cost of capital. In particular, conditions are derived under which a higher grant rate will raise the relative cost of capital.     

Community-based incentives for environmental protection: the case of green electricity

This paper examines the effectiveness of using community-level rewards to subsidize environmental protection. Specifically, we study the Connecticut Clean Energy Communities (CCEC) program that provides mostly symbolic rewards in the form of municipal photovoltaic installations in proportion to the number of households that voluntarily purchase green electricity. We find that the program causes a 22 % increase in the number of households purchasing green electricity in CCEC municipalities. The pattern of results suggests that the CCEC leads to the mobilization of community-based recruitment campaigns that increase signup rates by up to 700 % around the period of initial qualification. We also find that a change in the marginal incentive created by the program has little consequence on signup behavior. The implication for policy is that community-based incentives can be effective, but the size of the subsidy itself appears less important. Finally, simple calculations based on CCEC up-front costs reveal upper-bound, cost-effectiveness measures of $570 per household signup, 6.7 $\not {c} $ per kilowatt-hour of annual green-electricity demand, and $113 per ton of annual carbon-dioxide emission reductions.     

Regulatory quality,financial integration and equity cost of capital

We study the impact of international financial integration on firm‐level equity cost of capital in the presence of regulatory differences. International financial integration reduces the domestic cost of capital in the presence of well‐defined regulations that make it easier for foreign firms to overcome information asymmetry. We study this relationship for 55 countries for the period 2002 to 2014. Using multilevel mixed estimations, we find a negative relationship between cost of capital and both financial openness and regulatory quality. However, economies with better regulatory quality have a positive relationship between financial openness and cost of capital. Our results inform policy on the cost of higher level of regulations on firms’ equity cost of capital, especially when an economy has a high level of financial openness.     

Multi-dimensional risk and the cost of business cycles

This paper analyzes the welfare costs of business cycles when workers face uninsurable idiosyncratic labor income risk. In accordance with the previous literature, this paper decomposes labor income risk into an aggregate and an idiosyncratic component, but in contrast to the previous literature, this paper allows for multiple sources of idiosyncratic labor income risk. Using the multi-dimensional approach to idiosyncratic risk, this paper provides a general characterization of the welfare cost of business cycles when preferences and the (marginal) process of individual labor income in the economy with business cycles are given. The general analysis shows that the introduction of multiple sources of idiosyncratic risk never decreases the cost of business cycles, and strictly increases it if there are cyclical fluctuations across the different sources of risk. This paper also provides a quantitative analysis based on a version of the model that is calibrated to match US labor market data. The quantitative analysis suggests that realistic variations across two particular dimensions of idiosyncratic labor income risk increase the welfare cost of business cycles by a substantial amount.