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Journal Article

The Cost of Capital, Corporation Finance and the Theory of Investment

01 Jan 1958-The American Economic Review (Research Foundation of the Institute of Chartered Financial Analysts)-Vol. 48, Iss: 3, pp 261-297

AbstractThe potential advantages of the market-value approach have long been appreciated; yet analytical results have been meager. What appears to be keeping this line of development from achieving its promise is largely the lack of an adequate theory of the effect of financial structure on market valuations, and of how these effects can be inferred from objective market data. It is with the development of such a theory and of its implications for the cost-of-capital problem that we shall be concerned in this paper. Our procedure will be to develop in Section I the basic theory itself and to give some brief account of its empirical relevance. In Section II we show how the theory can be used to answer the cost-of-capital questions and how it permits us to develop a theory of investment of the firm under conditions of uncertainty. Throughout these sections the approach is essentially a partial-equilibrium one focusing on the firm and "industry". Accordingly, the "prices" of certain income streams will be treated as constant and given from outside the model, just as in the standard Marshallian analysis of the firm and industry the prices of all inputs and of all other products are taken as given. We have chosen to focus at this level rather than on the economy as a whole because it is at firm and the industry that the interests of the various specialists concerned with the cost-of-capital problem come most closely together. Although the emphasis has thus been placed on partial-equilibrium analysis, the results obtained also provide the essential building block for a general equilibrium model which shows how those prices which are here taken as given, are themselves determined. For reasons of space, however, and because the material is of interest in its own right, the presentation of the general equilibrium model which rounds out the analysis must be deferred to a subsequent paper.

Topics: Internal financing (57%), Capital call (56%), Corporate finance (55%), General equilibrium theory (55%), Market timing hypothesis (54%)

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Abstract: In this paper we draw on recent progress in the theory of (1) property rights, (2) agency, and (3) finance to develop a theory of ownership structure for the firm.1 In addition to tying together elements of the theory of each of these three areas, our analysis casts new light on and has implications for a variety of issues in the professional and popular literature, such as the definition of the firm, the “separation of ownership and control,” the “social responsibility” of business, the definition of a “corporate objective function,” the determination of an optimal capital structure, the specification of the content of credit agreements, the theory of organizations, and the supply side of the completeness-of-markets problem.

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Abstract: This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.

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Abstract: This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common-law countries generally have the strongest, and Frenchcivil-law countries the weakest, legal protections of investors, with German- and Scandinavian-civil-law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.

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References
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Book
01 Jan 1936
Abstract: Part I. Introduction: 1. The general theory 2. The postulates of the classical economics 3. The principle of effective demand Part II. Definitions and Ideas: 4. The choice of units 5. Expectation as determining output and employment 6. The definition of income, saving and investment 7. The meaning of saving and investment further considered Part III. The Propensity to Consume: 8. The propensity to consume - i. The objective factors 9. The propensity to consume - ii. The subjective factors 10. The marginal propensity to consume and the multiplier Part IV. The Inducement to Invest: 11. The marginal efficiency of capital 12. The state of long-term expectation 13. The general theory of the rate of interest 14. The classical theory of the rate of interest 15. The psychological and business incentives to liquidity 16. Sundry observations on the nature of capital 17. The essential properties of interest and money 18. The general theory of employment re-stated Part V. Money-wages and Prices: 19. Changes in money-wages 20. The employment function 21. The theory of prices Part VI. Short Notes Suggested by the General Theory: 22. Notes on the trade cycle 23. Notes on mercantilism, the usury laws, stamped money and theories of under-consumption 24. Concluding notes on the social philosophy towards which the general theory might lead.

15,140 citations


01 Jan 1956
Abstract: Distribution of Incomes of Corporations Among Dividens, Retained Earnings, and Taxes Author(s): John Lintner Source: The American Economic Review, Vol. 46, No. 2, Papers and Proceedings of the Sixtyeighth Annual Meeting of the American Economic Association, (May, 1956), pp. 97-113 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/1910664 Accessed: 26/06/2008 14:06

3,402 citations


Book
01 Jan 1938
Abstract: what is tobin s q theory definition and meaning, investment theories finance fandom powered by wikia, theory of investment value documents pdfs download, in finance working paper rpf 272 bank risk mon 09 jul, john burr williams wikipedia, working paper entreprenrskapsforum, impact of value added tax on investment growth in nigeria, the theory of investment value part 1 hurricane capital, theory of investment value documents pdfs download, 7 new theories of investment are explained below, keynes theory of investment multiplier with diagram, the financial theory of investment cfeps, review of the theory of investment value by john burr, seven controversial investing theories investopedia, the theory of investment value yoonix de, in finance working paper rpf 272 bank risk mon 09 jul, p d f d o w n l o a d the theory of investment value, value investing wikipedia, value investing theory and practical models, value investing theory and practical models, value investing applied to the socially responsible sector, the theory of investment value four enduring takeaways on, investment tobin s q lecture 10 econ 4310, the y theory of investment nyu stern school of business, p d f d o w n l o a d the theory of investment value, valuation approaches and metrics a survey of the theory, theory of investment value pdf le petit tonneau, value investing bridging theory and practice stanford, the theory of investment value google books, amazon com the theory of investment value, john burr williams wikipedia, working paper entreprenrskapsforum, seven controversial investing theories investopedia, theories of value marxists internet archive, value investing wikipedia, the theory of investment value 1956 john b williams, the theory of investment value yoonix de, the theory of investment behavior by dale w jorgenson, determining intrinsic value the cook amp bynum fund, the theory of investment behavior by dale w jorgenson, net present value rule sharper insight smarter investing, capm theory advantages and disadvantages, the y theory of investment nyu stern school of business, amazon com the theory of investment value, 2007 08 25 the theory of investment value, review of the theory of investment value by john burr, theory of investment value pdf, determining intrinsic value the cook amp bynum fund, theory of investment cruel org, valuation approaches and metrics a survey of the theory, theory of investment value ebay, theory of investment value pdf, value investing applied to the socially responsible sector, theory of investment value john burr williams gwclan de, the stock market and corporate investment a test of, the theory of investment value four enduring takeaways on, the essentials of portfolio construction morgan stanley, the theory of investment value part 1 hurricane capital, 2007 08 25 the theory of investment value, net present value rule sharper insight smarter investing, theory of investment value pdf le petit tonneau, what is tobin s q theory definition and meaning, the theory of investment value documents pdfs download, the theory of investment value book 1938 worldcat org, the financial theory of investment cfeps, the theory of investment value documents pdfs download, graduate macro theory ii notes on investment, graduate macro theory ii notes on investment, the theory of investment value google books, option pricing applications in equity valuation nyu, 7 new theories of investment are explained below, the theory of investment value 1956 john b williams, the theory of investment value book 1938 worldcat org, theory of investment value ebay, theory of investment value john burr williams gwclan de, value investing margin of safety numeraire com

738 citations



Journal ArticleDOI
Abstract: The interest in capital equipment analysis that has been evident in the business literature of the past five years is the product of numerous social, economic, and business developments of the postwar period. No conclusive listing of these developments can be attempted here. However, four should be mentioned which are of particular importance in this search for a more systematic method for discovering, evaluating, and selecting investment opportunities. These are: (1) the high level of capital outlays (in absolute terms); (2) the growth in the size of business firms; (3) the delegation of responsibility for initiating recommendations from top management to the profit center, which has been part of the general movement toward decentralization; and (4) the growing use of “scientific management” in the operations of the business firm.

722 citations


"The Cost of Capital, Corporation Fi..." refers background in this paper

  • ...Comparing (5) with (6) we see that as long as V2> V1 we must have Y1 > Y2, so that it pays owners of company 2's shares to sell their holdings, thereby depressing S2 and hence V2; and to acquire shares of company 1, thereby raising Si and thus V1....

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