Industry specific effects in investment performance and valuation of firms

A necessary criterion for a performance measure in corporate governance is the degree to which it mirrors how well the management succeeds in maximizing firm value. Such a performance measure is marginal q which links changes in firm value to the investments undertaken by the management. Empirical studies of investment and performance based on marginal q have demonstrated the usefulness of this measure. Most research however, has mainly focused on long-term performance. This paper takes a short-term perspective and, based on the marginal q-theory, considers how firms’ market values change in the extreme stock price cycle of a stock market bubble. Using a data set of listed Swedish corporations we find an anomaly in form of a new industry specific effect that, in addition to investment, explains changes in firm value.

EXCHANGE RATE,EXPECTED PROFIT AND CAPITAL STOCK ADJUSTMENT: JAPANESE EXPERIENCE

This paper empirically investigates the impact of exchange rate shocks on capital stock adjustment in the Japanese industry. An intertemporal optimization model is developed, in which an individual corporation in an open economy adjusts its capital stock according to Tobin's q. By explicitly considering the marginal q, the transmission mechanism from real exchange rate shocks to investment dynamics is examined based on the Vector Autoregressive model. Empirical evidence suggests that the depreciation of the Japanese yen increases the expected profitability of the firm and stimulates investment, especially in the machinery sector.     

The stock market and investment: another look at the micro-foundations of q theory

This paper introduces a novel distinction between real q andfinancial q. The paper examines three versions of financialq developed by Brainard and Tobin, Minsky and Hayashi, respectively.These theories differ regarding the nature of stock market pricedetermination and their use of marginal productivity theory.It is shown that non-profit maximising behaviour by managersdoes not invalidate q theory. It is also shown that if managersand shareholders have different profit expectations, this leadsto an equilibrium value of q that differs from unity. Lastly,the implicit claims in q theory regarding the efficient roleof stock markets as regulators of capital accumulation are shownto depend on assumptions about stockholder behaviour.     

The Wicksell-Tobin investment model

We formalize in this paper Wicksell's investment decision model and compare it with Tobin's q-theory. Wicksell's firms either compare the natural rate of interest with the prevailing market interest rate or the capital values with the replacement costs of investment projects. This exposition of Wicksell's approach reveals some striking similarities with Tobin's supply-price-of-capital model, which relates the marginal efficiency of capital to the rate of return required by portfolio investors in the well-known q-ratio. The ratio market value to replacement cost of capital should, therefore, more appropriately be termed the Wicksell-Tobin q. Our formalization of Wicksell's investment theory appears to open up a promising new avenue for further research in cases where banks provide the source of funds.     

A note on the statistical properties of aggregate q measures

Many different measures of Tobin's q have been proposed which differ in measurement methods and data sources. This paper evaluates the similarities and differences in the statistical properties of the different measures using ARIMA and factor analysis methods. The statistical properties of average and marginal q measures are found to be quite different.     

The emerging global financial architecture and exchange rate regimes in a volatile world

Previous work has documented inflation effects on Tobin's q in the long run. This paper examines whether the FED's different policies and chairmen tenure have an impact on Tobin's q, after a modified stylized AD-AS model shows that central banks affect q. We do find changing responses of q depending on the pre-Volcker and post-Volcker periods.     

Capital–labor substitution and balanced growth

This paper explores how different values of the elasticity of substitution between capital and labor (σ) impact on the balanced growth paths and growth potential of a country in exogenous growth models. The behavior of the system depends on the value of σ and the passage of σ through two critical values causes a qualitative change in the nature of the singular points and of its trajectories. The balanced growth path defined by a singular point in the form of a saddle-path exists and is locally stable if σ lies between two critical values.     

Tobin's q, investment, and the endogenous adjustment of financial structure

Should q theory be modified to take account of financial structure? This paper analyzes a general equilibrium q model where financial structure affects firm value. Agency costs and taxes combine to yield an interior solution for the endogenous debt–equity ratio. Although q is still a ‘sufficient statistic’ for investment, the endogenous adjustment of financial structure alters the relation between the interest rate and investment. In this model an increase in the corporate tax rate could either raise or lower the steady-state capital stock. Furthermore, both q and investment could jump in opposite directions to that of their steady-state values.     

A model with endogenously determined cycles, discounting and growth

Summary. This article reexamines the role of consumption in growth and emphasises the external effects of aggregate consumption, viewed as consumption standards, as an additional impediment in the growth process. These external effects raise the productivity of the individuals and are positively related to their valuation of the future. Conditions are established under which this results in a marginal value of wealth that is an increasing function of consumption. This brings new types of multiple steady states, local indeterminacies and cyclical motions. Imposing extra homogeneity restrictions, balanced growth solutions with endogenous impatience emerge. The possibility of multiple convergent paths is univocally related to endogenous discount effects. A comparison with a benchmark planning economy indicates an excessive value for the rate of time preference and emphasises its insufficient adaptation to future utility in a stationary setting. Discrepancies along the transition path that rest on endogenous impatience versus fixed discount appear in a non-stationary environment when the competitive balanced growth solution is indeterminate. Received: May 5, 1996; revised version: May 19, 1997     

Public-good valuation and intra-family allocation

I derive values of marginal changes in a public good for two-person households, measured alternatively by household member i’s willingness to pay (WTP) for the good on behalf of the household, WTP _i (H), or by the sum of individual WTP values across family members, WTP(C). Households are assumed to allocate their resources in efficient Nash bargains over private and common household goods. WTP _i (H) is then defined by trade-offs between the public good and the household good, and WTP(C) by trade-offs of between the public good and private goods. WTP _i (H) is found to be higher (lower) than WTP(C) when member i has a relatively high (low) marginal valuation of the public good, but tends on average to equal WTP(C). As a consequence, individuals tend to represent households correctly on average when questioned about the household’s WTP for a public good, even when they are purely selfish and answer truthfully. Adding all members’ WTP answers on behalf of the household then leads to double counting. Pure and paternalistic altruism (the latter attached to consumption of the public good) move each member’s WTP on behalf of the household closer to the true sum of individual WTP, but only paternalistic altruism raises this sum.      

Taxation and the stock market valuation of capital gains and dividends: Theory and emphirical results

Dividends seem to be more heavily taxed than capital gains. Why then do corporations pay dividends rather than repurchasing shares or retaining earnings? Either corporations are not acting in the interests of shareholders, or else shareholders desire dividends sufficiently for nontax reasons to offset the tax effect.In this paper, we measure the relative valuation of dividends and capital gains in the stock market, using a variant of the capital asset pricing model. We find that dividends are not valued differently systematically from capital gains. This finding is consistent with share price maximization by firms but inconsistent with the fact that most shareholderspay a heavier tax on dividends.We also show that the relative value of dividends provides an indirect measure of a marginal Tobin's q. The measured value of dividends relative to capital gains tends to be higher during prosperous periods, as is consistent with this interpretation. We hope that this time series on a marginal Tobin's q will prove to be useful in forecasting the rate of investment.     

Social learning and costly information acquisition

Summary. Short-lived agents want to predict a random variable q\theta and have to decide how much effort to devote to collect private information and consequently how much to rely on public information. The latter is just a noisy average of past predictions. It is shown that costly information acquisition prevents an unbounded accumulation of public information if (and only if) the marginal cost to acquire information is positive at zero (C￠(0) > 0)(C^\prime (0) > 0). When C￠(0) = 0C^\prime (0) = 0 public precision at period n, _boxclose_boxclose\tau_n, tends to infinity with n but the rate of convergence of public information to q\theta is slowed down with respect to the exogenous information case. At the market outcome agents acquire too little private information. This happens either with respect to a (decentralized) first best benchmark or, for n large, with respect to a (decentralized) second best benchmark. For high discount factors the limit point of market public precision always falls short of the welfare benchmarks whenever C￠(0) > 0C^\prime (0) > 0. In the extreme, as the discount factor tends to one public precision tends to infinity in the welfare-optimal programs while it remains bounded at the market solution. Otherwise, if C￠(0) = 0C^\prime (0) = 0 public precision accumulates in an unbounded way both at the first and second best solutions. More public information may hurt at either the market or second best solutions.     

Can the share economy cure our macroeconomic woes? Probably not

This paper introduces the major ideas in Martin Weitzman's The Share Economy. It notes that a “share” economy is one in which the marginal cost of labor is less than the average cost of labor; moreover, this condition can be induced by sharing revenues or profits. According to share theory, such contracts will lead firms to create more vacancies and thereby lower the average unemployment rate. Weitzman proposes to induce more share arrangements by giving a tax preference to share-type income.     

WHY IS CASH (STILL) SO ENTRENCHED? INSIGHTS FROM CANADIAN SHOPPING DIARIES

One similarity among many developed economies is the predominance of cash over electronic payments in terms of payment frequency, especially for the low‐value transactions that are the bulk of retail payments. We use the Bank of Canada's 2009 Methods‐of‐Payment Survey, which collected information on consumers' payment choices through shopping diaries, to estimate a simple model of choice between cash and other payment methods. Results suggest that the main reasons cash is still a popular payment instrument in Canada, especially for low‐value transactions, are its wide acceptance among merchants compared with other alternatives, speed and ease of use, and low marginal cost when on hand. (JEL E41, D12, L81)     

Modelling dynamic storage function in commodity markets: Theory and evidence

In this work, we derive a model to investigate the optimal storage policy in metal commodity markets. From an inter-temporal setting, we carry out a criterion driving the stockholding decisions based on Tobin's q rule in which marginal benefits from holding inventories can be compared with marginal storage costs.We estimate the model for the world copper market by taking into account both spot price and convenience yield equations. In our sample, the estimated models are statistically robust and economically coherent with the theory, even though the patterns of the inventory accumulation process show high sensitivity to the uncertainty about worldwide economic conditions.     

经济转轨中国有资本比重的最优路径选择——一个动态模型

This paper presents a dynamic model based on the utility maximum decisions of both the government and private sectors to study the optimal withdrawing path of state-owned capital in economic transition. Numerical simulation shows that: (1) an optimal transition path still exists when treating government and private sectors separately, (2) when the transition cost is higher than its critical value, the economy will never start a transition by itself. In addition, this analysis offers theoretical supports for some reform policies adopted by governments during transition. __________ Translated from Jingjixue Jikan 经济学(季刊) (China Economic(Quarterly)), 2007, 6(2): 561–580     

Creative capital,information and communication technologies,and economic growth in smart cities

ABSTRACT

We study aspects of economic growth in a stylized smart city with two distinct features. First, the modeled inhabitants of this city are smart because they possess skills. Using the language of Richard Florida, these inhabitants comprise the city’s creative class and hence they possess creative capital. Second, the city is smart because it uses information and communication technologies (ICTs) and we model one specific kind of ICT use. In this setting, we first derive expressions for three growth related metrics. Second, we use these metrics to show that the economy of smart city A converges to a balanced growth path (BGP). Third, we compute the growth rate of output per effective creative capital unit on this BGP. Fourth, we study how heterogeneity in initial conditions affects outcomes on the BGP by introducing a second smart city B into the analysis. At time t?=?0 two key savings rates in city A are twice as large as in city B. We compute the ratio of the BGP value of income per effective creative capital unit in city A to its value in city B. Finally, we compute the ratio of the BGP value of skills per effective creative capital unit in city A to its value in city B.     

Balanced Contributions Axiom in the Solution of Cooperative Games

In a gamevin characteristic function form, suppose the Banzhaf value ψ is used to pay a coalitionSalready formed. Then coalitionSno longer receivesv(S); instead it receivesR^ψ(S) = ∑_{i ∈ S}ψ_i(v_s), wherev_Sdenotes the subgame of coalitionS. Surprisingly, the Shapley value of this new game Sh(N, R^ψ) is equal to the Banzhaf value ofv. In this paper we establish a similar result for all values satisfying balanced contributions axiom. Additionally, we introduce player's weights to obtain the corresponding result in the nonsymmetric case.Journal of Economic LiteratureClassification Number: C71     

Uncertainty and the Voluntary Provision of a Pure Public Good in a Two‐Moment Decision Model

In this paper, we explore the potential benefits of uncertainty that may arise in a two‐moment model of the voluntary provision of a pure public good. We find that an increase in a given contributor i’s risk associated with the aggregate contribution level of the other contributors (i.e., an increase in social uncertainty) induces that contributor to increase his own contribution level if and only if the uncertainty's incremental effect on the expected value of his net marginal utility is negative. Contributor i’s welfare likewise increases when a closely related condition is met, namely that the uncertainty's marginal effect on his expected marginal utility value of the public good exceeds its countervailing effect on the numeraire. Further, the corresponding aggregate contribution to the public good increases in the presence of free‐riding if and only if the incremental effect of contributor i’s contribution on the aggregate expected value of all other contributors’ net marginal utilities is small‐enough positive. We derive similar conditions for the case of private uncertainty, where the increase in contributor i’s risk is associated with his own marginal valuation of the public good. A simple example illustrates these conceptual results. Numerical analysis demonstrates that an increase in private uncertainty can have a nonmonotonic impact on contributor i’s welfare.     

Can Trade Be Good for the Environment?

We analyze the impact of trade in a differentiated good on environmental policy when there is local and transboundary pollution. In autarky, the (equivalent) pollution tax is set equal to the marginal damage from own emissions. If the strategic policy instrument is a tax, leakage occurs under trade and tends to lower the tax. The net terms of trade effect, due to the exportable and importable varieties of the differentiated good, tends to increase the tax. We derive conditions under which pollution taxes under trade are higher than the marginal damage from own emissions, i.e., higher than the Pigouvian tax and than that under autarky. Then, pollution falls under trade relative to autarky. When countries use quotas/permits to regulate pollution, there is no leakage, while the net terms of trade effect tends to make pollution policy stricter. The equivalent tax is always higher than the marginal damage from own emissions, i.e., always higher than the Pigouvian tax and than that under autarky; hence, pollution always falls under trade. Our analysis provides some insight into the findings in the empirical literature that trade might be good for the environment.