Open AccessJournal Article
The Cost of Capital, Corporation Finance and the Theory of Investment
TLDR
In this article, the effect of financial structure on market valuations has been investigated and a theory of investment of the firm under conditions of uncertainty has been developed for the cost-of-capital problem.Abstract:
The 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.read more
Citations
More filters
Journal ArticleDOI
How Much Do Firms Hedge with Derivatives
Wayne R. Guay,S.P. Kothari +1 more
TL;DR: This article found that corporate derivatives use is a small piece of non-financial firms' overall risk profile, and suggest the need to rethink some empirical research documenting the economic importance of firms' derivative use.
Journal ArticleDOI
The impact of capital‐structure choice on firm performance: empirical evidence from Egypt
TL;DR: In this article, the impact of capital structure choice on firm performance in Egypt as one of emerging or transition economies is investigated using multiple regression analysis in estimating the relationship between the leverage level and firm's performance.
Journal ArticleDOI
Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans
TL;DR: In this paper, the authors exploit sharply nonlinear funding rules for defined benefit pension plans in order to identify the dependence of corporate investment on internal financial resources in a large sample, showing that corporate expenditures decline with mandatory contributions to DB pension plans, even when controlling for correlations between the pension funding status itself and the firm's unobserved investment opportunities.
Journal ArticleDOI
Uncertainty resolution and the theory of depreciation measurement
TL;DR: In this paper, the authors examine how a firm's depreciation policy influences the relation between the resulting accounting numbers and the market value of the firm's equity and show that the resulting book value and accounting earnings numbers are such that, for all periods, the book rate of return equals the cost of
Journal ArticleDOI
Taxes and Corporate Finance: A Review
TL;DR: In this paper, tax research related to domestic and multinational capital structure, payout policy, compensation policy, risk management, and organizational form is reviewed, followed by a summary of the related empirical evidence and a discussion of unresolved issues.
References
More filters
Book
General Theory of Employment, Interest and Money
TL;DR: In this article, a general theory of the rate of interest was proposed, and the subjective and objective factors of the propensity to consume and the multiplier were considered, as well as the psychological and business incentives to invest.
Distribution of incomes of corporations among dividends, retained earnings and taxes
TL;DR: Lintner as discussed by the authors discusses the distribution of income of corporations among dividends, retained earnings, and taxes in the context of the Sixtyeighth Annual Meeting of the American Economic Association.
Journal ArticleDOI
Capital Equipment Analysis: The Required Rate of Profit
Myron J. Gordon,Eli Shapiro +1 more
TL;DR: 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.
Book
The theory of investment value
TL;DR: The theory of investment value is a popular topic in finance fandom powered by wikia as discussed by the authors, where many investing theories have been proposed, e.g., investment multiplier theory, investment multiplier with diagram, the theory of the investment multiplier, investment value maximization theory, and investment value minimization theory.