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.     

The cost of capital,asset prices,and the effects of monetary policy

The primary objective of this paper is to study the interaction between monetary policy, asset prices, and the cost of capital. In particular, we explore this issue in a setting where individuals face idiosyncratic risk. Incomplete information also provides a transactions role for money so that monetary policy can be studied. In contrast to standard monetary growth models which focus on the transmission of monetary policy to the demand for capital goods, we incorporate a separate capital goods sector so that the supply response to monetary policy is taken into account. Consequently, in contrast to the standard monetary growth model, monetary policy plays an important role in investment activity through the relative price of capital goods. Moreover, different sources of productivity can affect the degree of risk sharing. Although the optimal money growth rate falls in response to an increase in productivity in either sector of the economy, monetary policy should react more aggressively to the level of productivity in the capital sector.     

Distress cost and corporate financing policy: evidence from the equity options market

This study examines the link between distress cost and corporate financing policy through the lens of the equity options market. Four features stand out. First, the cost of distress is comparable to the tax shield from debt financing. Second, the results provide evidence that ordinary least-squares estimates understate the impact of market leverage on default risk. Third, consistent with the information models of debt maturity, firms with higher default probability use more long-term debt. Finally, more distressed firms rely on secured debt to a greater extent. Overall, the results support the trade-off theory of capital structure.     

On the validation of cost push: A comment

A recent article in this journal examined the effects of ‘cost-push’ disturbances in a model in which government expenditure was fixed in nominal rather than real terms. It was suggested that, under certain circumstances, these nominal government expenditure targets could destabilise the model. In this note we show that, on the contrary, this particular model is always stable, whether or not government expenditure is fixed in nominal or real terms.     

Study of the effect of a Financial Transaction Tax on the corporate cost of capital

We study the impact of a Financial Transaction Tax (FTT or Tobin Tax) on the corporate cost of capital. We consider the results on the impact of transaction costs on implied volatility and then use the utility maximization of a market-maker and its asymptotic solution. The FTT impact on volatility, in highly liquid equity option markets, is within two decimals (‘the tick value’) and is insignificant. The volatility impact is considerable for illiquid option markets especially long-dated equity options, used for the hedging of credit default swaps (CDS). The credit spread increase is computed using a structural model, and amounts between 30 and 60 basis points (b.p). per annum, for 5–20 year maturities, and a volatility level of 30%. The impact decreases with the corporation leverage ratio. We calibrate from the CDS market the implied volatility for six European corporations and find an increase in spreads by up to 60%. For a corporation with a 343 b.p. 5-year CDS spread, the increase amounts to 174 b.p. On the basis of this sample, the impact we find is between 5 and 20 times higher than the one computed in the study of Lendvai et al. which has been used by European Union authorities to assess the impact on the cost of capital.     

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.     

Intangible capital,market share and corporate strategy

This paper theoretically and empirically identifies the determinants of firm profitability and market share for twelve broadly defined US manufacturing industry groups. The effects of advertising, research and development, and diversification on profitability and market share are econometrically tested for each industry group, and corporate strategy implications of the results are considered. One major result of the analysis is that research and development (R&D) tends to be much more effective as a means of enhancing firm profitability than advertising, and research and development spending decisions are more closely related to the profitability of R&D than advertising decisions are related to the profitability of advertising.     

Intangible capital,corporate valuation and asset pricing

Recent studies have found unmeasured intangible capital to be large and important. In this paper we observe that by nature intangible capital is also very different from physical capital. We find it plausible to argue that the accumulation process for intangible capital differs significantly from the process by which physical capital accumulates. We study the implications of this hypothesis for rational firm valuation and asset pricing using a two-sector general equilibrium model. Our main finding is that the properties of firm valuation and stock prices are very dependent on the assumed accumulation process for intangible capital. If one entertains the possibility that intangible investments translates into capital stochastically, we find that plausible levels of macroeconomic volatility are compatible with highly variable corporate valuations, P/E ratios and stock returns. We thank Ellen McGrattan, Edward Prescott, Rene Stulz and an anonymous referee for their helpful comments as well as workshop participants at FAME, the 5th Conference of the Swiss Society for Financial Market Research, the European Central Bank, Columbia Business School Finance Free Lunch and the University of Zürich. This research has benefited from financial support from the National Center for Competence in Research “Financial Valuation and Risk Management”. The National Centers of Competence in Research are managed by the Swiss National Science Foundation on behalf of the Federal Authorities.     

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.     

Financial development,financial liberalization and social capital

The relationship between financial liberalization policies and financial development is controversial. The impact of these policies differs greatly across countries. In the literature, the quality of formal institutions has been identified as an important source of this heterogeneity, as countries with a weak institutional environment generally fail to benefit from financial liberalization. Using panel data covering 82 countries for the period 1973–2008, we find evidence that social capital may substitute for formal institutions as a prerequisite for effective financial liberalization policies. In particular, we find that during the post Washington-consensus period countries with a high prevailing level of social capital can ensure that financial liberalization positively influences financial development, despite the poor quality of their formal institutions.     

Tax policy, venture capital, and entrepreneurship

The paper studies the effects of tax policy on venture capital activity. Entrepreneurs pursue a single high risk project each but have no own resources. Financiers provide funds, covering investment cost plus an upfront payment, in exchange for a share in the firm. The contract must include incentives to enlist full effort of entrepreneurs. Venture capitalists also assist with valuable business advice to enhance survival chances. The paper develops a general equilibrium framework with a traditional and an entrepreneurial sector and investigates the effects of taxes on the equilibrium level of managerial advice, entrepreneurship and welfare. It considers differential wage and capital income taxes, a comprehensive income tax, progressive taxation as well as investment and output subsidies to the entrepreneurial sector.     

Debt policy, corporate taxes, and discount rates

This paper applies the standard risk-neutral valuation framework to tax shields generated by dynamic debt policies. We derive a partial differential equation (PDE) for the value of the debt tax shield. For a class of dynamic debt policies that depend on the asset's free cash flows, value, and past performance, we obtain closed-form solutions for the PDE. We also derive the tax-adjusted cost of capital for free cash flows and analyze the conditions under which the weighted average cost of capital is an appropriate discount rate. Finally, we derive closed-form solutions for equity betas, which differ from the formulas that have traditionally been used to lever and unlever equity betas.     

Monetary policy,corporate profit and house prices

By using portfolio theory, we explain the highly observed correlation between the seemingly unrelated corporate profit and house prices in the United States. We test the predictions of the underlying model using a vector autoregression representation and find the data to be supportive of the theory. Monetary impulses explain high correlation as both corporate profit and house prices exhibit similar dynamics in response to a monetary impulse. Robustness checks are presented by using the federal funds rate instead of the monetary base as a measure of the stance of monetary policy and by using other model variations. In all cases, the results are robust.     

Government spending, capital accumulation and the optimal policy rule: The role of public service capital

In this paper, we modify the Djajić [Djajić, S., 1987. “Government Spending and the Optimal Rates of Consumption and Capital Accumulation,” Canadian Journal of Economics 20, 544–554.] model in such a way that government consumption expenditure provides utility to households via the total stock of government services rather than the government consumption flow alone. By using such a framework, we show that the optimality condition for the public service capital stock is the marginal rate of substitution between public service capital and consumption that equals the intertemporal marginal rate of transformation between the two goods. In addition, we show that the relationship between private consumption and public service capital in a household's utility plays an important role in determining the transitional behavior of relevant variables. We also examine the second-best government consumption expenditure policy. By contrast, in the standard flow specification, e.g., Turnovsky and Brock [Turnovsky, S.J. and Brock, W.A., 1980. “Time Consistency and Optimal Government Policies in Perfect Foresight Equilibrium,” Journal of Public Economics 13, 183–212.], Ihori [Ihori, T., 1990. “Government Spending and Private Consumption,” Canadian Journal of Economics 23, 60–69.], and Turnovsky and Fisher [Turnovsky, S.J. and Fisher, W.H., 1995. “The Composition of Government Expenditure and its Consequences for Macroeconomic Performance,” Journal of Economic Dynamics and Control 19, 747–786.], the second-best government consumption expenditure is decided on the basis that the marginal utility of consumption is equal to the discounted sum of the marginal utility of the government's flow spending.     

社会资本经济分析研究综述

自世界银行开展一系列社会资本研究项目之后,经济学家们开始了将社会资本融入到经济分析框架的努力。文章概述经济学领域内社会资本的概念、社会资本形成和社会资本作用机制的经济分析等方面研究新进展。