Showing papers on "Physical capital published in 1977"

Capital budgeting and the capital asset pricing model: good news and bad news

Abstract: THIS PAPER DERIVES and presents expressions for the market value of a long-lived capital investment project, assuming that the capital asset pricing model (CAPM) holds in each period. We use these expressions to examine the determinants of beta and to evaluate traditional capital budgeting procedures based on the discounted cash flow formula and the opportunity cost of capital. The good news is that it is possible to value capital investments using relatively simple formulas derived from the CAPM. Also, the traditional procedures give close-to-correct answers, provided that the right asset beta is used to calculate the discount rate. The bad news is that the right asset beta depends on project life, the growth trend of expected cash flows, and other variables which are not usually considered important in assessing business risk. Moreover, for growth firms the right discount rate cannot be inferred from the observed systematic risk of the firm's stock, even if the firm invests only in projects of a single risk class. The reason is that growth opportunities affect observed systematic risk.

An empirical test of the alternative hypotheses of national and international pricing of risky assets

Abstract: the international level, a model of segmented capital markets would be more appropriate. In reality, during the post World War II period, there were more formal and informal barriers to capital transactions on an international than on a domestic level. But what level of international capital market imperfection is needed to induce strictly local pricing of risk assets? As the quality of a positive theory of valuation should be judged by its predictive ability, the crucial question is whether a valuation model assuming no barriers to international capital flows predicts rates of return better than a model that assumes complete market segmentation. The answer to this question is of great importance to individual investors and to corporations making capital budgeting decisions. National and international risk pricing imply different criteria for corporate capital budgeting decisions. The type of benefits attainable by international portfolio investment depends on the level of international capital market integration. Prior studies have tested either the hypothesis that assets are priced in segmented capital markets against the null-hypothesis of no relationship [3, 4, 13] or have tested the hypothesis that assets are priced in integrated capital markets against the null hypothesis of no relationship [15]. However, the question whether assets are priced in segmented or integrated capital markets cannot be answered by comparing the results of two cross-sectional regressions using the alternative risk measures as the single independent variable. In the regression using the incorrect risk measure, the residual is not independently distributed from the independent variable. As a consequence, least squares estimates will be inconsistent.1 By identifying those parts of the total rate of return variations that represent a

Capital gains taxation and year‐end stock market behavior

Abstract: This traditional view of the effects of capital gains taxation on stock prices denies that securities are perfect substitutes and, rather, asserts that taxation-motivated transactions cause a movement along a downward sloping demand schedule.2 Thus, this view directly contradicts the widely accepted proposition that the capital markets are efficient. In addition, the traditional view of the effect of capital gains taxation on the stock market assumes that the capital gains tax has a significant influence on investors' market behavior because capital gains taxes give investors an incentive to realize capital losses and to defer the realization of capital gains.3 The primary purpose of this paper is to examine the validity of this assumption. By analyzing year-end patterns in the trading volumes of common stocks that represent unrealized capital gains or losses in their owners' portfolios, we develop empirical evidence concerning the extent to which year-end income tax considerations influence investor behavior. The paper is organized as follows: Section II summarizes our hypotheses about the year-end effects of capital gains taxation; Sections III and IV describe the methodology employed and results obtained, respectively, in the analysis of yearend trading volume; and Section V summarizes the conclusions to be drawn from the study.

Notes on capital and peasantry

Abstract: Bernstein examines the diverse ways in which capital and the colonial state incorporated rural producers into the production and consumption of commodities as the means of securing their own subsistence. Regulations, services and the monopoly of crop producers have been used to require an often recalcitrant peasantry to organize production to meet the requirements of international capital and the local state for particular commodities, for trading profits, and for revenues and foreign exchange. The peasantry must be analysed in its relations with capital and the state, in varying concrete conditions, which means within capitalist relations of production. These are mediated not through the wage relation, but through various forms of household production by producers who are not fully expropriated, and who are engaged in a struggle with capital/state for effective possession and control of the conditions of production.

Marx's Capital and Capitalism Today

Abstract: Part 1: Value 1. Value, Exploitation and Profit 2. Bohm-Bawerk and Hilferding 3 I I Rubin-Essays on Marx's Theory of Value. Appendix The Problem of "Reproduction " in Capital. Part 2: Capital and Laws of Tendency 4. Epistemology, Causality and Laws of Tendency 5. The Contradictory Combination of the Forces and Relations of Production 6. The Law of the Tendency of the Rate of Profit to Decline Part 3: Classes and the Structure of the Social Formation 7. Classical Marxism 8. Determination in the Last Instance 9. Mode of Production, Social Formation, Classes 10. Possession of and Separation from the Means of Production 11. Agents and Social Relations 12. Economic Class-Relations and the Organisation of Production 13. Conclusion

Domestic labour and capital

Abstract: The direct products of domestic labour are not commodities; such products as clean clothes and cooked meals are not produced for the market by domestic labour and are not exchanged. Rather, they are produced for the direct satisfaction, without further transformation, of the needs of the producer and her family. In this sense domestic labour is private production. But it is not only distinguished by its location in non commodity production; it is also private production in another sense. No division of labour exists within its realm. All housewives perform very similar tasks, and they perform them in isolation, unless aided by other members of their families. Neither of the types of division of labour that Marx described as operating within commodity production—the a priori division of labour between workers employed by an individual capital through the organising control and authority of the capitalist, and the a posteriori social division of labour between workers employed by different capitals which, through the market, operates via the coercive force of competition—neither of these divisions of labour touches domestic labour. The only division of labour to which domestic labour is subject is that it is divided from commodity production. Indeed, this division comprises the specific form that the sexual division of labour, in its broadest sense, takes in capitalist society.

Capital, Crisis and the State:

Abstract: As capitalism has moved into a period of open crisis and reconstruction, the necessity has increasingly been forced upon the working class movement to sharpen our understanding of the dynamic of capitalist accumulation and its relation to class struggle. One crucial aspect of this is the question of the relationship between capital and the state, since the state plays a vital part in the maintenance and reproduction of capital as a relation of class domination. Under the influence of reformism, revisionism and dogmatism, which for a number of reasons dominated Marxist thought from the 1930s to the 1960s, the analysis of the processes of capitalist accumulation became separated from that of class struggle and the state. The analysis of capital accumulation came to be thought of as ‘economics’ in a narrow sense, reified into the investigation of the relations between ‘things’, instead of between ‘social processes appearing in a thing-like shell’ ( Rosdolsky, 1974, p. 66). The contradictions of accumulation have too often been thought of as ‘economic laws’ operating from the outside upon political class relations. The state has been thought of as ‘the state in capitalist society’, rather than as being itself one aspect of the social relations of capital, and therefore stamped throughout, in all its institutions, procedures and ideology, with the contradictions of capital. Hence, there has been a constant undertow towards a reformist conception of revolution as being aimed essentially at the seizure of the existing state apparatus.

Aspects of Optimal Unemployment Insurance: Search, Leisure and Capital Market Imperfections

Abstract: The object of this paper is to examine the importance of capital market assumptions. A special continuous-time model is developed in sections II-IV which is applicable to the perfect capital market case. It can also be used when there is no capital market at all (section IV). For 'reasonable' parameter values the optimal replacement rate (ratio of benefits to gross wage) appears to be less than 20% when capital markets are perfect but over 70% when they are non existent (i.e. no saving or dis-saving).

Capital structure rearrangements and me-first rules in an efficient capital market

Abstract: PERHAPS THE ISSUE OF FOREMOST CONCERN to the theory of business finance as it has evolved over the past two decades has been the impact of corporate financial policy on the market value of a firm's common stocks and bonds. Building on the foundation laid by Modigliani and Miller (1958, 1961, 1963) numerous authors,1 using a variety of analytic techniques, have shown that in a perfect capital market neither the debt-equity decision nor the dividends-retained earnings decision should have any effect on the total market value of a firm's securities once its investment decision has been determined and made known. Some of these same authors have shown further that the existence of corporate income taxes provides sufficient economic incentive for firms to maximize their use of corporate debt financing. However, even then, it is only the tax deductibility of interest payments that has any effect on firm value. These various analyses typically have assumed that firms have no debt outstanding when they establish their financing policies. Since most firms are on-going entities, the more general case is that firms will make capital structure decisions after they have issued some debt. When a firm has debt outstanding, in the absence of a prior arrangement to protect its bondholders, stockholders may rearrange the firm's capital structure to transfer wealth belonging to the firm's creditors to themselves. This possibility has been noted by Stiglitz (1972, p. 462).

Capital Investment under Uncertainty with Abandonment Options

Abstract: This paper is an analytic treatment of the abandonment decision in capital investment analysis. It provides a methodology which has application in obtaining better estimates for project value and risk.

Education and the income differential: an estimation for Rawalpindi city

Abstract: Empirical tests of the human capital hypothesis-that eduCation increases an individual's income-have been undertaken in several countries with favourable results [131. These results show that (1) income differentials between individuals of different educational levels are wide; (2) the differentials establish shortly after the initial years of work and maintain through the duration of the life cycle; (3) the differentials are greater in developing countries than in developed countries; (4) the returns to education, after allowing for educational costs, exceed the returns to physical capital investment in developing countries; (5) the highest returns are to primary education; and (6) private returns exceed social returns. Which, if not all, of these results are true for Pakistan is not known. This paper yields such comparative results through an application of the human capital hypothesis to Rawalpindi City. The data for Rawalpindi are for males and derive from a socio-economic survey conducted by the Pakistan Institute of Development Economics in 1975.

The role of the multinational firm in the integration of segmented capital markets

Abstract: I. INTRODUCTION A CAPITAL MARKET for asset claims is integrated when the opportunity set of investments available to each and every investor is the universe of all possible asset claims. In contrast, a capital market is segmented when certain groups of investors limit their investments to a subset of the universe of all possible asset claims. Such market segmentation can occur because of ignorance about the universe of possible asset claims, or because of transactions costs (brokerage costs, taxes, or information acquisition costs), or because of legal impediments. From an international perspective market segmentation typically occurs along national borders, a condition wherein investors in each country acquire only domestic asset claims. Early literature on segmented capital markets-Grubel [9], Levy-Sarnat [14], Lessard [13], employing a mean-variance portfolio theoretic framework, have stressed the benefits of diversifying investments across national borders, namely the pooling of risks that results from investing in projects that are less than perfectly correlated. More recently, Subrahmanyam [20] points out, however, that when segmented capital markets are integrated, in addition to the diversification effect (always positive), there is a wealth effect (possibly negative) which arises out of changes in the macro-parameters of the risk-return relationship. Hence, in general, no statement can be made regarding the welfare implications of capital market integration without specification of the investors' utility functions. For the special cases of quadratic, exponential, and logarithmic utility functions, it can be shown' that international capital market integration is Pareto-optimal, that is, the welfare of individuals in the integrated economies will not decline, and will generally improve. The positive effect of an expansion in the opportunity set offsets any negative wealth effect. The literature cited above, however, is concerned primarily with the complete and direct integration of segmented capital markets, a situation in which the opportunity to invest directly in foreign asset claims is available to individual investors of different countries. But in some important cases, especially when the

The Middle East and the United States: A Problem of “Brain Drain”

Abstract: In explaining the determinants of economic growth, economists have attempted to distinguish the relative contributions made by various inputs. Theodore Schultz concluded that improvements in human capital have made larger contributions to growth than increases in physical capital. E. F. Denison was even more specific in his pioneering studies of changes in real national income in the United States from 1927 to 1967, estimating that 23 percent of the growth could be explained by improvements in the educational level of the labor force and 20 percent by advances in technological and managerial knowledge. On the basis of such results, we may conclude that expenditures on education and training, public health, and general research contribute significantly to productivity in the industrialized nations by raising the quality of human capital; thus these outlays command a continuing return in the future.

Capital in canada - its social and private performance 1965-1974

Abstract: The principal objective of this study is to estimate the social and private rates of return from physical capital located in the sectors of the Canadian economy for the ten year period from 1965 to 1974. As part of this analysis the effective rates of the various taxes that are levied on the income from capital will be estimated for the industries in manufacturing and non-manufacturing as well as for some other sectors such as mining, agriculture and residential housing. To conduct these estimations it was necessary to transform the traditional financial accounting data into values which are very similar to those which would result from the adoption of a current replacement cost system of accounting in Canada.

Evidence of non‐homogeneity of capital costs within “risk‐classes”

Abstract: A PERSISTENT CHARACTERISTIC of both the theory and measurement of corporate costs of capital is the notion of "risk-class." These costs vary directly with the systematic risks of holding the given securities, and, in theory, each firm has a specific cost of capital unique to its particular riskiness. But as a practical matter, cross-sectional estimates require a sample of firms with risk attributes which are homogeneous in some sense. Typically, cross-sections of firms are drawn from classifications called industries. The intent of this procedure is to capture random sampling variability and to exclude systematic (heterogeneous) variabilities. The inference is that the cost of capital estimated from the sample applies basically to all firms in the population (industry) sampled. The invention of a "risk-class" of securities deriving from the variability of the earnings streams of the firms was introduced in the first Modigliani and Miller (M&M) paper [12]. They subsequently accepted an alternative formulation of their propositions which substituted the notion of Arrow-Debreu conditional commodities in future states for their own, incompletely satisfying invention [14, 10 p. 335]. The principal papers dealing with this alternative formulation are by Jack Hirschleifer and Joseph Stiglitz [8, 9, 18]. Neither Hirschleifer nor Stiglitz, however, presumes that the state-theoretic formulation leads to empirical specifications which overcome any of the difficulties of the risk-class formulation. Stiglitz, in fact, turns to an association of future states with phases of a business cycle, which need not be consistent with the spirit of the initial Arrow-Debreu theory and, more important, introduces a time-series concept into the cross-sectional estimation problem of M&M. Since the invention of "risk-classes" of securities remains an ad-hoc rationalization of existing empirical practices, and since it is employed not only by M&M but also by some of their critics [1, 2, 4], this paper closely addresses the logic of associating "risk-class" with industry, in particular the believed-to-be most homogeneous of industries, electric utilities. Further, beyond the explicit statistical testing of homogeneity, the quality of the estimates obtained by M&M in [10] and the correct specification of the valuation model is examined. Using a method of weighting noted by M&M but bypassed in their own work, [10, p. 372] our results are based on a more efficient estimating procedure for measuring the cost of capital among the sample firms. Incidental to this, an anomaly in the estimated rate of growth arises and is discussed but not resolved.

The Production of Human Capital Over Time

Abstract: A decade has passed since the passage of the federal Elementary and Secondary Education Act (ESEA) of 1965. Current federal expenditures for compensatory education under that act now exceed $1.5 billion annually. Those expenditures are largely focused on children in the elementary grades, in particular, kindergarten through grade three.' A major objective of compensatory education programs can be viewed as reducing poverty by increasing the human capital stocks of students at the end of their school-lives (i.e., the terminal human capital stock). Proponents of early childhood intervention programs expect terminal human capital stocks to be higher when limited resources are reallocated from later to earlier grade levels. However, empirical research has by and large failed to fulfill this expectation. Evaluations of early childhood intervention programs like Headstart have generally produced inconclusive results (Cicirelli, 1969; Bronfenbrenner, 1974; Ryan, 1974).2 There are several possible explanations for this finding, but the one explored in this research is low marginal productivity, with respect to the stock of terminal capital, of school inputs received in the early grades. While the conventional belief among psychologists and educators has been that this productivity is high (Hunt, 1961; Bloom, 1964), others have argued that the marginal product of school inputs in producing terminal capital is higher in the adolescent years than the early childhood years (Rohwer, 1971). If the latter view is correct, compensatory education programs should maximize terminal capital by increasing school resources in the secondary grades, not the early elementary grades. The purpose of this article is to estimate the productivity of school inputs over time for both "advantaged" and "disadvantaged" children. The estimates obtained will have implications for the optimal allocation of limited school resources over the school-life.3 In the case of disadvantaged children, the estimates provide one possible explanation for the presumed failure of compensatory, early childhood education programs. In the case of advantaged children, the results offer one prediction of the success of non-compensatory, early childhood education, which is receiving increasing political support these days. The model of human capital accumulation is derived and described in the next section, followed by a discussion of the data and sample used in the estimation of the model. Subsequently, the estimated results are presented, and the policy implications of the results are explored.

The capital market

Abstract: A market for funds is subject to the same sort of forces as are to be found in operation in other markets. The price of funds reacts to the usual laws of supply and demand. Within the broad framework there are separate ‘markets’ for different types of securities: long-term, short-term, gilt-edged, ordinary shares etc., and hence separate rates of return for such securities. The price of securities (and consequently the rate of return to funds) does not simply depend on the flow of new savings compared with the level of investment in capital projects, but on speculative movements reflecting the public’s varying preferences for holding cash rather than securities.

Optimal capital accumulation and durable goods production

Abstract: We have examined the optimal production of a consumer durable with the aid of a capital stock subject to deterioration. We assumed the durable was owned by the producer and its services rented; this is equivalent to assuming sale with perfect foresight and used good markets. If the firm has no more than modest initial endowments of productive capital and durable good, the deterioration of capital induces a hump-like profile of the stock of the durable product, with the top of the hump above the eventual steady state level. The rental price of the consumer durable, therefore, falls from its initial level to a low from which it ascends to its steady state value. This implication might be amenable to empirical testing. Among the possible extensions of this work might be an analysis of the relationship between market structure and the choice of durability along the lines of [7] with allowance for deterioration of the capital stock. Recent generalizations of the traditional model of capital accumulation to take into account obsolescence and maintenance, as in [19], [11] and [13], might also be applied to this model. Lastly, policy questions regarding the consequences of an investment credit tax addressed in [4] and [16] might also be investigated in the context of the model presented in this paper.

Timber Management Decision Making under Imperfect Capital Markets

Abstract: Capital market imperfections seldom have been considered in the choice of financial criteria for making timber management decisions. A forest planning model for evenaged timber management is developed to evaluate criterion selection under imperfect markets. Some investment rules are shown to be equivalent to maximizing the firm's liquidation value for certain capital market conditions. Although imperfect capital markets severely limit wealth accumulation, small deviations from the optimal harvesting schedules do not severely affect the firm's value. Much concern about criterion selection would evaporate if the firm's investing and financing functions were integrated into a single process.

Instability in the Capital Markets of U.S. Agriculture

Abstract: Instability in capital markets of U.S. agriculture can be reflected in interest rates paid and charged by agricultural lenders, in loan volumes, total and by lender, and in loan quality of lender portfolios. In this paper I focus principally on interest rates and market shares. Both reveal important aspects of economic performance by participants in agriculture capital markets, as well as sources and forms of instability. My concern is limited largely to debt capital markets because they supply the vast bulk of market-supplied capital in U.S. agriculture.