Showing papers on "Physical capital published in 2004"
TL;DR: The authors empirically examined whether firms engage in dynamic rebalancing of their capital structures, while allowing for costly adjustment, and found that firms respond to changes in their equity value, due to price shocks or equity issuances, by adjusting their leverage over the two to four years following the change.
Abstract: We empirically examine whether firms engage in dynamic rebalancing of their capital structures, while allowing for costly adjustment. We begin by showing that the presence of adjustment costs has significant implications for the dynamic behavior of corporate financial policy and the interpretation of previous empirical results. Then, after confirming that financing behavior is consistent with the presence of adjustment costs, we use a dynamic duration model to show that firms behave as though adhering to a financial policy in which they actively rebalance their leverage to stay within an optimal range. We find that firms respond to changes in their equity value, due to price shocks or equity issuances, by adjusting their leverage over the two to four years following the change. The presence of adjustment costs, however, often prevents this response from occurring immediately, resulting in shocks to leverage that have a persistent effect. Our evidence suggests that this persistence is more likely a result of optimizing behavior in the presence of adjustment costs, as opposed to indifference towards capital structure.
1,234 citations
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TL;DR: This paper examined how human, social, and organizational capital coexist to form distinct intellectual capital profiles across organizations and examined how investments in human resource management (HRM), information technology (IT), and research and development (R&D) differ across these three types of profiles and investigated differences in financial returns and Tobin's q between the profiles.
Abstract: Using data collected from executives in 208 organizations, this study takes a configurational approach to examine how human, social, and organizational capital coexist to form distinct intellectual capital profiles across organizations. We then examine how investments in human resource management (HRM), information technology (IT), and research and development (R&D) differ across these intellectual capital profiles and investigate differences in financial returns and Tobin's q between the profiles. Results indicate that a relatively small group of superior performing organizations exhibit high levels of human, social, and organizational capital. Most firms, however, tend to focus primarily on only one form of intellectual capital, and a small group of underperforming organizations have very low levels of all three types of intellectual capital. At a general level, HRM and IT investments appear to influence intellectual capital development more than R&D investments. More specifically, HRM investments tend to be higher in firms with profiles high in human and social capital, while IT investments are stronger in firms with profiles high in social capital. Further, HRM, IT, and R&D investments are all very high in the group of superior performing organizations that have high levels of human, social, and organizational capital.
984 citations
TL;DR: The Integrated Questionnaire for the Measurement of Social Capital (SC-IQ) as discussed by the authors is a set of empirical tools for measuring social capital with a focus on applications in developing countries.
Abstract: The idea of social capital has enjoyed a remarkable rise to prominence in both the theoretical and applied social science literature over the last decade. While lively debate has accompanied that journey, thereby helping to advance our thinking and to clarify areas of agreement and disagreement, much still remains to be done. One approach that we hope can help bring further advances for both scholars and practitioners is the provision of a set of empirical tools for measuring social capital. The purpose of this paper is to introduce such a tool-the Integrated Questionnaire for the Measurement of Social Capital (SC-IQ)-with a focus on applications in developing countries. The tool aims to generate quantitative data on various dimensions of social capital as part of a larger household survey (such as the Living Standards Measurement Survey or a household income/expenditure survey). Specifically, six dimensions are considered: groups and networks; trust and solidarity; collective action and cooperation; information and communication; social cohesion and inclusion; empowerment and political action. The paper addresses sampling and data collection issues for implementing the SC-IQ and provides guidance for the use and analysis of data. The tool has been pilot-tested in Albania and Nigeria and a review of lessons learned is presented.
913 citations
TL;DR: Benabou as discussed by the authors developed a growth theory that captures the endogenous replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth in the transition from the Industrial Revolution to modern growth.
Abstract: This paper develops a growth theory that captures the replacement of physical capital accumulation by human capital accumulation as a prime engine of growth along the process of development. It argues that the positive impact of inequality on the growth process was reversed in this process. In early stages of the Industrial Revolution, when physical capital accumulation was the prime source of growth, inequality stimulated development by channelling resources towards individuals with a higher propensity to save. As human capital emerged as a growth engine, equality alleviated adverse effects of credit constraints on human capital accumulation, stimulating the growth process. This research develops a growth theory that captures the endogenous replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth in the transition from the Industrial Revolution to modern growth. The proposed theory offers a unified account for the effect of income inequality on the growth process during this transition. It argues that the replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth changed the qualitative impact of inequality on the process of development. In the early stages of the Industrial Revolution, when physical capital accumulation was the prime source of economic growth, inequality enhanced the process of development by channelling resources towards individuals whose marginal propensity to save is higher. In the later stages of the transition to modern growth, as human capital emerged as a prime engine of economic growth, equality alleviated the adverse effect of credit constraints on human capital accumulation and stimulated the growth process. The proposed theory unifies two fundamental approaches regarding the effect of income distribution on the process of development: the Classical approach and the Credit Market Imperfection approach. 1 The Classical approach was originated by Smith (1776) and was further interpreted and developed by Keynes (1920), Lewis (1954), Kaldor (1957), and Bourguignon (1981). According to this approach, saving rates are an increasing function of wealth and inequality therefore channels resources towards individuals whose marginal propensity to save 1. The socio-political economy approach provides an alternative mechanism: equality diminishes the tendency for socio-political instability, or distortionary redistribution, and hence it stimulates investment and economic growth. See the comprehensive survey of Benabou (1996b).
898 citations
TL;DR: In this article, the authors examined the effects of two forms of capital, i.e., human capital and social capital, on innovation at the country level, using secondary data from the World Development Report on a country's overall human development.
Abstract: The authors examine the effects of two forms of capital, i.e. human capital and social capital, on innovation at the country level. We use secondary data from the World Development Report on a country's overall human development to test for a relationship between human capital and innovation. We also use previous conceptualizations of social capital as comprising trust, associational activity, and norms of civic behaviour to test for relationships between these indicators of social capital and innovation using data from the World Values Survey. Unlike most previous studies that examined human and social capital within a given country, we develop and empirically test a theoretically grounded model that relates human and social capital to innovation at the societal level across 59 different countries, thus providing a more global view of the role of these two forms of capital in generating value. We find strong support for the positive relationship between human capital and innovation and partial support fo...
834 citations
TL;DR: The authors explored the determinants of capital structure of Chinese-listed companies using firm-level panel data and found that the capital choice decision decision of Chinese firms seems to follow a new Pecking order (retained profit, equity, and long-term debt).
781 citations
TL;DR: In this article, a calibrated dynamic trade-off model with adjustment costs is used to simulate firms' capital structure paths and the results of standard cross-sectional tests on this data are found to be qualitatively and quantitatively consistent with those reported in the empirical literature.
Abstract: In the presence of frictions firms adjust their capital structure only infrequently. As a consequence, in a dynamic economy the leverage of most firms, most of the time, is likely to differ from the optimum leverage at the time of readjustment. This paper explores the empirical implications of this observation. A calibrated dynamic trade-off model with adjustment costs is used to simulate firms' capital structure paths. The results of standard cross-sectional tests on this data are found to be qualitatively - and, in some cases, even quantitatively - consistent with those reported in the empirical literature. In particular, the standard interpretation of some test results would lead to the rejection of the model used to generate the data. The framework can explain a number of observed puzzles related to leverage. In particular, in the simulated cross-sectional samples leverage: (a) is inversely related to profitability; (b) can be largely explained by stock returns; (c) is mean-reverting. The results suggest that, in the presence of infrequent adjustment, cross-sectional properties of economic variables in dynamics may be fundamentally different from those derived assuming that they are always at their target levels. Taken together, the results suggest a rethinking of the way capital structure tests are conducted.
770 citations
TL;DR: The authors examined how cash flows, investment expenditures and stock price histories affect corporate debt ratios and found that these variables have a substantial influence on changes in capital structure, and that over time, financing choices tend to move firms towards target debt ratios that are consistent with the tradeoff theories of capital structure.
Abstract: This paper examines how cash flows, investment expenditures and stock price histories affect corporate debt ratios. Consistent with earlier work, we find that these variables have a substantial influence on changes in capital structure. Specifically, stock price changes and financial deficits (i.e., the amount of external capital raised) have strong influences on capital structure changes, but in contrast to previous conclusions, we find that their effects are subsequently at least partially reversed. These results indicate that although a firm's history strongly influence their capital structures, that over time, financing choices tend to move firms towards target debt ratios that are consistent with the tradeoff theories of capital structure.
639 citations
TL;DR: In this paper, the authors investigated the impact of foreign direct investment on economic growth in Nigeria, for the period 1970-2001, and found that both private capital and lagged foreign capital have small, and not a statistically significant effect, on the economic growth.
552 citations
TL;DR: In this article, the authors show that corporate investment decisions can explain the conditional dynamics in expected asset returns, including operating leverage, reversible real options, fixed adjustment costs, and finite growth opportunities.
Abstract: We show that corporate investment decisions can explain the conditional dynamics in expected asset returns. Our approach is similar in spirit to Berk, Green, and Naik (1999), but we introduce to the investment problem operating leverage, reversible real options, fixed adjustment costs, and finite growth opportunities. Asset betas vary over time with historical investment decisions and the current product market demand. Book-to-market effects emerge and relate to operating leverage, while size captures the residual importance of growth options relative to assets in place. We estimate and test the model using simulation methods and reproduce portfolio excess returns comparable to the data. CORPORATE INVESTMENT DECISIONS are often evaluated in a real options context, 1 and option exercise can change the riskiness of a firm in various ways. For example, if growth opportunities are finite, the decision to invest changes the ratio of growth options to assets in place. Additionally, the resulting increase in physical capital may generate operating leverage through long-term obligations, including the fixed operating costs of a larger plant, wage contracts, and commitments to suppliers. It is natural to conclude that expected returns might be related to current and historical investment decisions of the firm. The empirical literature has long recognized a need to account for the dynamic structure of risk when testing asset pricing models. 2 A small but
543 citations
TL;DR: This paper developed an intertemporal framework for measuring capital in which consumer utility maximization governs the expenditures that are current consumption versus those that are capital investment, and applied this principle to newly developed estimates of business spending on intangibles.
Abstract: Business outlays on intangible assets are usually expensed in economic and financial accounts Following Hulten (1979), this paper develops an intertemporal framework for measuring capital in which consumer utility maximization governs the expenditures that are current consumption versus those that are capital investment This framework suggests that any business outlay that is intended to increase future rather than current consumption should be treated as capital investment Applying this principle to newly developed estimates of business spending on intangibles, we find that, by about the mid-1990s, business investment in intangible capital was as large as business investment in traditional, tangible capital Relative to official measures, our framework portrays the US economy as having had higher gross private saving and, under plausible assumptions, fractionally higher average annual rates of change in real output and labor productivity from 1995 to 2002
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TL;DR: The authors survey managers in 16 European countries on the determinants of capital structure and find that firms' financing policies are influenced by both their institutional environment and their international operations, and that firms determine their optimal capital structures by trading off costs and benefits of financing.
Abstract: We survey managers in 16 European countries on the determinants of capital structure. Financial flexibility and earnings per share dilution are primary concerns of managers in issuing debt and common stock, respectively. Managers also value hedging considerations and use "windows of opportunity" when raising capital. We find that although a country's legal environment is an important determinant of debt policy, it plays a minimal role in common stock policy. We find that firms' financing policies are influenced by both their institutional environment and their international operations. Firms determine their optimal capital structures by trading off costs and benefits of financing.
TL;DR: In this paper, the authors define a new index, namely the value creation efficiency of intellectual capital, which is defined as the difference between revenue, profit, and GDP to indicate successful performance, while value is being destroyed and not created.
Abstract: Taking into account the transformation in economic reality towards a knowledge economy it seems logical that we treat IC as a resource, equal to that land, physical assets, and financial capital. This means that it is not anymore treated as a cost but as an investment. In order for the new system to be consistent we have to define a new index, namely the value creation efficiency of intellectual capital. Its empirical applications shows that while revenue, profit and GDP may indicate successful performance, IC efficiency may indicate the opposite, that value is being destroyed and not created.
TL;DR: In this article, the relationship between the Spanish business cycle and the capital buffers held by Spanish commercial and savings banks in an incomplete panel of institutions covering the period 1986-2000, which comprises a complete cycle.
TL;DR: Task-specific human capital as mentioned in this paper is the idea that some of the human capital an individual acquires on the job is specific to the tasks being performed, as opposed to being specific to a firm.
Abstract: Since Gary Becker’s (1964) seminal work, the theoretical and empirical literature on human capital has focused almost exclusively on general-purpose and firm-specific human capital. In this paper we discuss the implications of a third type of human capital, which we call task-specific, and which we believe is potentially as commonplace and as important as the two classic types. By task-specific human capital we mean that some of the human capital an individual acquires on the job is specific to the tasks being performed, as opposed to being specific to the firm. In other words, task-specific human capital is the simple but plausible idea that much of the human capital accumulated on the job is due to task-specific learning by doing. The idea of task-specific human capital is closely related to occupationand industryspecific human capital. In each case, human capital is specific to the nature of the work, not specific to the firm. Hence, when capital is accumulated, multiple firms value the capital, so most (or even all) of the value of the capital will be reflected in the worker’s wage. The main difference between the idea of task-specific human capital and occupationand industryspecific human capital is in how the idea is applied. We argue that task-specific human capital has much wider applicability than suggested (so far) by the occupationand industry-specific human-capital literatures; the specific issues we address are cohort effects, job design, and promotions. Another argument in the literature closely related to ours is the classic argument of Adam Smith (1776) in the Wealth of Nations concerning returns to specialization. Smith’s argument was that, due to learning-by-doing at the level of the task, productivity can be enhanced by having each job entail fewer tasks. We believe that Smith was correct in focusing on learningby-doing at the level of the task as an important idea for thinking about organizations. The goal of our paper is to describe some of the other implications of this idea for the design and operation of organizations.
TL;DR: In this paper, a simple urban economics framework is proposed to highlight how the trade-off between optimal and equilibrium city size behaves when introducing dynamic human capital externalities beside the classical congestion externalities.
TL;DR: In this article, the results of an international survey among 313 CFOs on capital budgeting, cost of capital, capital structure, and corporate governance were presented, and the results showed that the U.S. corporate finance practice appears to be influenced mostly by firm size, to a lesser extent by shareholder orientation, while national differences are weak at best.
Abstract: In this paper we present the results of an international survey among 313 CFOs on capital budgeting, cost of capital, capital structure, and corporate governance. We extend previous results of Graham and Harvey (2001) by broadening their sample internationally, by including corporate governance, and by applying multivariate regression analysis. We document interesting insights on how theoretical concepts are applied by professionals in the U.K., the Netherlands, Germany, and France and compare these results with the U.S. We discover compelling variations between large and small firms across all markets. While large firms frequently use present value techniques and the capital asset pricing model when assessing the financial feasibility of an investment opportunity, CFOs of small firms still rely on the payback criterion. Regarding debt policy we document more subtle disparities across firms and national samples. We also find substantial variation in corporate governance structures, which turn out to be more oriented at shareholder wealth in the Anglo-Saxon countries. Corporate finance practice appears to be influenced mostly by firm size, to a lesser extent by shareholder orientation, while national differences are weak at best.
TL;DR: In this article, the authors construct a hybrid of some prominent growth models that have international knowledge externalities and show that the hybrid model does a surprisingly good job of generating realistic dispersion of income levels with modest barriers to technology adoption.
Abstract: Externalities play a central role in most theories of economic growth. We argue that international externalities, in particular, are essential for explaining a number of empirical regularities about growth and development. Foremost among these is that many countries appear to share a common long run growth rate despite persistently different rates of investment in physical capital, human capital, and research. With this motivation, we construct a hybrid of some prominent growth models that have international knowledge externalities. When calibrated, the hybrid model does a surprisingly good job of generating realistic dispersion of income levels with modest barriers to technology adoption. Human capital and physical capital contribute to income differences both directly (as usual), and indirectly by boosting resources devoted to technology adoption. The model implies that most of income above subsistence is made possible by international diffusion of knowledge.
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TL;DR: In this paper, the authors solve and estimate a dynamic model that allows agents to optimally choose their labor hours and consumption and that allows for both human capital accumulation and savings, and show that the intertemporal elasticity of substitution is much higher than the conventional estimates.
Abstract: We solve and estimate a dynamic model that allows agents to optimally choose their labor hours and consumption and that allows for both human capital accumulation and savings. Estimation results and simulation exercises indicate that the intertemporal elasticity of substitution is much higher than the conventional estimates and the downward bias comes from the omission of the human capital accumulation effect. The human capital accumulation effect renders the life-cycle path of the shadow wage relatively flat, even though wages increase with age. Hence, a rather flat life-cycle labor supply path can be reconciled with a high intertemporal elasticity of substitution.
TL;DR: In this article, the authors apply the VAICTM method to analyze the data of Japanese banks for the financial period 1 April 2000 − 31 March 2001, and discuss their impact on the banks' value-based performance.
Abstract: The performance of economic entities has been a research matter even in the ancient world. The human “genius” has been recognized as a vehicle for certain valuable capabilities and as the critical enabler of transforming processes. But it has not been considered as an intellectual capitalizator or intellectual asset. This has happened recently in the promising field of intellectual capital and its related philosophy of knowledge management, although the related research status quo is still in its infancy. Applies the VAICTM method in order to analyze the data of Japanese banks for the financial period 1 April 2000‐31 March 2001. Analyzes the intellectual or human (HC) and physical capital (CA) of the Japanese banking sector and discusses their impact on the banks’ value‐based performance. Focuses on the actual status of HC and CA capital and its predictive, discriminative and integrative impact on the “intellectual” added value‐based performance situation. Confirms the existence of significant performance...
TL;DR: In this paper, a strictly positive probability of migration to a richer country, by raising both the level of human capital formed by optimizing individuals in the home country and the average level of nonmigrants in the country, can enhance welfare and nudge the economy toward the social optimum under a well-controlled restrictive migration policy.
TL;DR: In this article, the authors developed a theory of fertility and child educational choice that offers an explanation for the persistence of poverty within and across countries, under the key assumption that individuals' productivity as teachers increases with their own human capital.
Abstract: This Paper develops a theory of fertility and child educational choice that offers an explanation for the persistence of poverty within and across countries. The joint determination of the quality (education) and quantity of children in the household is studied under the key assumption that individuals' productivity as teachers increases with their own human capital. As a result, the poor choose high fertility rates with low education investment and therefore, their offspring are poor as well. Furthermore, the high fertility rates in poor economies dilute physical capital accumulation and amplify the effect of child quality choice on economic growth. The model generates multiple steady states even though the technologies employed in the production of human capital and output are convex and preferences are convex and homothetic.
TL;DR: In this paper, the importance of risk, the buffer as an insurance, competition effect, supervisory discipline, and economic growth for determining the determination of buffer capital is analyzed using bank-level panel data from Norway.
TL;DR: In this paper, the authors introduce the concept of entrepreneurship cap, which identifies three types of capital as the drivers of economic growth: physical capital, human capital, and knowledge capital.
Abstract: Economics has identified three types of capital as the drivers of economic growth—physical capital, human capital, and knowledge capital. This article introduces the concept of entrepreneurship cap...
TL;DR: In this paper, the authors present a dynamic model of optimal bank capital in which the bank optimizes over costs associated with failure, holding capital, and flows of external capital, showing that a regulatory minimum requirement based on var, if binding, is likely to be procyclical.
Abstract: This paper presents a dynamic model of optimal bank capital in which the bank optimizes over costs associated with failure, holding capital, and flows of external capital. The solution to the infinite-horizon stochastic optimization problem is related to period-by-period value at risk (var) in which the optimal probability of failure is endogenously determined. Over a cycle, var is positively correlated with optimal flows of external capital, but negatively correlated with optimal net changes in capital and the optimal level of total capital. Analysis of this pattern suggests that a regulatory minimum requirement based on var, if binding, is likely to be procyclical. The model points to several ways of reducing this problem. For example, a var-based requirement makes more sense if it is applied to external capital flows than if it is applied to the total level of capital. US commercial bank data since 1984 are generally consistent with the model.
TL;DR: In this paper, the authors consider the cross-country evidence for capital-skill complementarity using a time-series, cross-section panel of 73 developed and less developed countries over a 25-year period.
Abstract: Since Griliches (1969), researchers have been intrigued by the idea that physical capital and skilled labor are relatively more complementary than physical capital and unskilled labor. This capital-skill complementarity hypothesis has received renewed attention recently, as researchers have suggested that this phenomenon might account for rising wage inequality between skilled and unskilled workers in several developed countries. In this paper we consider the cross-country evidence for capital--skill complementarity using a time-series, cross-section panel of 73 developed and less developed countries over a 25 year period. In particular, we focus on three empirical issues. First, what is the best specification of the aggregate production technology to address the capital-skill complementarity hypothesis. Second, how should we measure skilled labor? Finally, is there any cross-country evidence in support of the capital-skill complementarity hypothesis? Our main finding is that we are unable to reject the null hypothesis of no capital-skill complementarity using our panel data set.
TL;DR: In this article, the authors investigate the channels through which debt affects growth, specifically whether debt affects either physical capital accumulation or total factor productivity growth, and test for the presence of nonlinearities in the effects of debt on the different sources of growth.
Abstract: This paper investigates the channels through which debt affects growth, specifically whether debt affects growth through factor accumulation or total factor productivity growth. It also tests for the presence of nonlinearities in the effects of debt on the different sources of growth. We use a large panel dataset of 61 developing countries over the period 1969-98. Results indicate that the negative impact of high debt on growth operates both through a strong negative effect on physical capital accumulation and on total factor productivity growth. On average, for high-debt countries, doubling debt will reduce output growth by about 1 percentage point and reduce both per capita physical capital and total factor productivity growth by somewhat less than that. In terms of the contributions to growth, approximately one-third of the effect of debt on growth occurs via physical capital accumulation and two-thirds via total factor productivity growth. The results are generally robust to the use of alternative estimators to control (to different extents) for biases associated with unobserved country-specific effects and the endogeneity of several regressors, particularly the debt variables. In particular, the results are shown to be compatible with a simultaneous significant effect of growth on debt ratios, as suggested by Easterly (2001).
TL;DR: This paper examined the relationship between the local levels of human capital and firm formation rates and found that formation rates differ with the share of adults with college degrees, especially for industries that normally require college-educated founders.
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TL;DR: In this article, the authors investigate the channels through which debt affects growth, specifically whether debt affects either physical capital accumulation or total factor productivity growth, and test for the presence of nonlinearities in the effects of debt on the different sources of growth.
Abstract: This paper investigates the channels through which debt affects growth, specifically whether debt affects growth through factor accumulation or total factor productivity growth. It also tests for the presence of nonlinearities in the effects of debt on the different sources of growth. We use a large panel dataset of 61 developing countries over the period 1969-98. Results indicate that the negative impact of high debt on growth operates both through a strong negative effect on physical capital accumulation and on total factor productivity growth. On average, for high-debt countries, doubling debt will reduce output growth by about 1 percentage point and reduce both per capita physical capital and total factor productivity growth by somewhat less than that. In terms of the contributions to growth, approximately one-third of the effect of debt on growth occurs via physical capital accumulation and two-thirds via total factor productivity growth. The results are generally robust to the use of alternative estimators to control (to different extents) for biases associated with unobserved country-specific effects and the endogeneity of several regressors, particularly the debt variables. In particular, the results are shown to be compatible with a simultaneous significant effect of growth on debt ratios, as suggested by Easterly (2001).
TL;DR: In this paper, the authors analyze the relationship between conglomerates' internal capital markets and the efficiency of economy-wide capital allocation, and identify a novel cost of conglomeration that arises from an equilibrium framework.
Abstract: We analyze the relationship between conglomerates' internal capital markets and the efficiency of economy-wide capital allocation, and identify a novel cost of conglomeration that arises from an equilibrium framework. Because of financial market imperfections engendered by imperfect investor protection, conglomerates that engage in "winner-picking" (Stein, 1997) find it optimal to allocate scarce capital internally to mediocre projects, even when other firms in the economy have higher productivity projects that are in need of additional capital. This bias for internal capital allocation can decrease allocative efficiency even when conglomerates have efficient internal capital markets, because a substantial presence of conglomerates might make it harder for other firms in the economy to raise capital. We also argue that the negative externality associated with conglomeration is particularly costly for countries that are at intermediary levels of financial development. In such countries, a high degree of conglomeration, generated for example by the control of the corporate sector by family business groups, may decrease the efficiency of the capital market. Our theory generates novel empirical predictions that cannot be derived in models that ignore the equilibrium effects of conglomerates. These predictions are consistent with anecdotal evidence that the presence of business groups in developing countries inhibits the growth of new independent firms due to lack of finance.