Estimating the Divisional Cost of Capital: An Analysis of the Pure-Play Technique

This paper suggests that the pure-play technique can be used in conjunction with the capital asset pricing model to determine the cost of equity capital for the divisions of a multidivision firm. Since the beta for a division is unobservable in the marketplace, a proxy beta derived from a publicly traded firm whose operations are as similar as possible to the division in question is used as the measure of the division's systematic risk. To provide empirical support for using the pure-play technique, a sample of multidivision firms and pure-play associated with each division is examined. It is shown that an appropriately weighted average of the betas of the pure-play firms closely approximates the beta of the multidivision firm.     

MODELLING HABIT PERSISTENCE*

The purpose of this paper is to derive the demand functions corresponding to an intertemporal linear expenditure system in which goods are durable, and in which there are penalty costs for changes in planned stocks. Taste changes over time can be interpreted as changes in the technology converting goods into characteristics.     

INFLATION,SECURITY VALUES,AND RISK PREMIA

The impact of stochastic inflation on the cross-sectional structure of nominal securities yields is examined. The analysis indicates that equilibrium required returns on debt and equity securities are affected differently by inflation and that the “Fisher Effect” is more likely to hold for equity returns than for debt yields. Implications for empirical investigations of portfolio performance and the real interest rate are explored.     

Impulse and diffusion in the study of technical change

A common model of innovation diffusion is extended to incorporate the interaction of demand growth and capacity growth, building in part on work by Kuznets and Burns on industrial growth and retardation. It is shown how price and production cost evolve during a diffusion process, and how Schumpeter's theory of the transient nature of innovator's profits has a natural place within the analysis of diffusion. The framework is intended to assist future analysis of the links between the diffusion and the evolution of a given technology, taking account of, eg, learning by doing, production bottlenecks and the inducement to innovation, and producer/adopter interaction to improve technological performance.