Capital Decisions Research Articles

Reply/Réponse Fiscal Competitiveness and Total Competitiveness: A Note

The theory that has been developed to derive the effective fiscal burden on cost of doing business (McKenzie, Mintz and Scharf 1997) allows one to measure effective tax rates on costs as a proper aggregator of effective tax rates on labour and capital) without observing the actual input prices. This is an improvement over past literature that incorporates non-capital taxes into effective tax rates on capital. This approach is quite wrong analytically since it overstates the effect of non-capital taxes on the capital decision.

Improved AHP Method for Selecting The Optimal Cool Storage Type in Air-conditioning System

This article introduces four common cool storage types in air conditioning systems: chilled water storage, ice storage, PCM cool storage, and high temperature water cool storage. The theoretical foundation of analytic hierarchy process (AHP) and the decision process are described. A simple multiple criteria hierarchy structure model is established. The improved AHP method is developed to select the optimal cool storage type. Results indicate that high temperature water cool storage is the optimal option. The improved AHP method, ranging from the simple personal decisions to the complex capital intensive decisions, offers an effective quantitative method, and has universal applicability in making an optimal selection for a given application in other fields.

PENGUJTAN PECKTTVG ORDER THEORY (POT): Pengaruh Leverage Terhadap Pendanaan Surplus dan Defisit pada lndustri Manufaktur di Bursa Efek lndonesia

This research is empirically examines the Pecking Mer Theory eOD. This is important since the POT discuss the factors effected the tevet of debt used by tfui company srrch as: the capocity of deficit due to internal cash tlow inadequocy for exercising the hwestment and its commitment to regululy pay dividend- On doing so, this research is intended to specifically examine the effect of surphs and deficit financing on the use of debt. The samples oe dr*vn trom compoies within maru{acturingsector which are listed at the Indonesiott Capital Stock Erchangeduring 2000-2005. Furthermore the data will be analyzed using the regression with dumrny vsiables. The result sltows, there is a negatively effect between long term debt with deficrt. The possible explanation is muket and economic condition effect the capital stttcryre decision. Keyword: Pecking Mer Theory eOD, debt, sarplus, deficit

Why Do Women's Wages Increase So Slowly Throughout Their Career? A Dynamic Model of Statistical Discrimination

Abstract. The aim of this paper is to explain the growing wage differentials between men and women during their working careers. We provide a dynamic model of statistical discrimination, which integrates specific human capital decisions: on‐the‐job training investment and wages are endogenously determined. We reveal a small wage differential at the beginning of women's career, but women's wages increase more slowly; this is partly due to a lower level of human capital investment by women and partly because firms smooth training costs between different periods.

Value-Relevant Disclosures (Value Reporting): Conceptual Framework and Evidence from German Listed Companies

The objective of this paper is threefold. First we develop a comprehensive framework for valuerelevant disclosures (Value Reporting)to serve as the theoretical background for Business Reporting in order to give guidance for preparers and standard setters in their task to structure the information presented in management reports concerning valuation issues. From this framework we derive a comprehensive list of information contents needed by investors for making capital allocation decisions. In the second part we use these criteria to analyze the disclosure practice of the 100 largest German listed companies. From this analysis we obtain an overall level of disclosure which in the third step we relate to economic determinants. The results show a significant influence of the firms business objective, but no influence of firm size, auditor size and the application of international accounting standards on the level of value-relevant voluntary disclosures.

How Investors Face Financial Risk Loss Aversion and Wealth Allocation

We studied how the capital allocation decisions and the loss version of nonprofessional investors change subject to behavioral factors. The optimal wealth allocation between risky and risk-free assets results within a value-at-risk (VaR) portfolio model, which involves assessing risk individually according to an extended prospect-theory framework. We showed how the past performance and the portfolio evaluation frequency affect investor behavior and prove myopic loss aversion holds across different evaluation frequencies. We also illustrated that 1 year is the optimal evaluation horizon at which, under practical constraints, maximization of risky holdings occurs. Finally, we presented evidence that indicates that researchers using standard VaR significance levels may be underestimating the loss aversion of individual investors.

The market reaction to capital expenditure announcements

The theory of the firm regards investment decisions as one of the fundamental and central activities of the modern firm. The normative aspect of the theory claims that firm resources should be allocated to value-creating positive NPV projects. The current literature has mostly focused on managerial behaviour in advanced economies and has reported evidence that shareholder wealth is positively affected when firms make capital spending decisions (Woolridge (1988) and McConnell and Muscarella (1985)). Recent work by La Porta, Lopez-de-Silanes, Shleifer and Vishney (2002) and Shleifer and Vishney (1997) document that corporate environments in emerging economies differ quite significantly from those in advanced economies. Claessens, Djankov, and Lang (2000) also report that many emerging markets are dominated by companies which have high ownership / asset concentration, and which are large in size and function as conglomerates. Berger and Ofek (1995) suggest that greater agency costs are incurred when firms engage in conglomeration. Accepting negative net present value projects and misallocating resources toward inefficient divisions are a manifestation of these agency costs, which negatively impact firm value (Jensen and Meckling (1976) and Mansi and Reeb (2002)). Insights from the published literature imply that these problems are likely to be more severe for firms that are operating in countries with majority share ownership and asset concentration, suggesting that the nature of managerial decisions made in emerging economies require empirical examination. This paper has three aims. The first is to conduct an event study of capital investment announcements to measure whether the investment decisions of South African companies are consistent with the goal of maximizing shareholder wealth. The second aim is motivated by a unique attribute of the South African economy. In addition to being classified as an emerging market, the South African economy is also dominated by large groups of holding companies, which are highly diversified (Castle and Kantor, 2000). Many of these conglomerates are managed by founding families and their descendents (Kantor, 2001). It has been reported that many local companies stray from their core activities into diversifications that lack any business logic (Gerson, 1992). In light of these important characteristics of the South African business structure, this paper also examines whether the wealth effects of capital expenditure announcements differ between diversified firms and focused firms. The third aim of this paper is to investigate whether the market reaction to capital expenditure announcements varies with the category of projects being announced, as well as other characteristics of the investment and the company making the announcement.

Intellectual capital and real options: agency theory and the dynamics of R&D investments

The real-options approach to R&D investment can be expanded through the integration of explicit modelling for knowledge value dynamics as well as agency-theoretic analysis. Our objective is to combine the market-related dynamics of the demand for R&D products with the firm-specific organisational dynamics of knowledge accumulation and value creation through knowledge. This objective is accomplished using the partially complete markets framework in real options. We introduce the knowledge-related significance of option-pricing parameters and show how these parameters affect investment policies and agency conflicts in R&D and intellectual capital decision making.

American Toy Company—The Zapper

This case provides a setting for analyzing the effects of various depreciation methods and expenditure capitalization decisions on divisional return on asset (ROA) measures.

With Strings Attached? Improving the Administration of Central State Financed Investment Projects in the PRC

This article takes a new look at the institutional core of China's economic planning—the State Development and Planning Commission (SDPC, 1998–2003)—focusing on its role in approving and fundraising for major capital investment projects. The primary objective of this inquiry is to identify changes in the network structure and procedures of inter-agency relations and central planners’ interactions with national legislators, which have produced a diversity of ‘organizational microclimates’ that shape the coherence of the national economic bureaucracy and central–local fiscal relations. Based on interviews of high-level officials and case studies of investment projects in energy, information technology, and transport sectors, it is argued that administrative reforms aiming to improve SDPC's regulatory capacity have been predicated on a concerted effort by key agencies and ministries under the State Council to reduce the window of opportunity for local and industrial interests to politicize capital allocation decisions. This finding suggests caution in interpreting contemporary China through the comparative lenses of a developmental state, a regulatory state, or a fiscal federalist system.

Comparative Social Capital: Networks of Entrepreneurs and Venture Capitalists in China and Russia

I compare networks of entrepreneurs and venture capitalists in China and Russia by examining professional social networks of software entrepreneurs and private equity investors from the perspectives of institutional theory and culture paradigm. In the empirical study, I draw on survey data from Beijing and Moscow based on interviews of 159 software entrepreneurs and 124 venture capital decisions. I found that professional networks of the Chinese software entrepreneurs are smaller, denser and more homogeneous in educational specializations, compared with the networks of Russian entrepreneurs. Furthermore, I found that both ties and interpersonal trust in the referral tie are stronger in China than in Russia.

Why Do Women's Wages Increase So Slowly Throughout Their Career? A Dynamic Model of Statistical Discrimination

The aim of this paper is to explain the growing wage differentials between men and women during their working careers. We provide a dynamic model of statistical discrimination, which integrates specific human capital decisions: on-the-job training investment and wages are endogenously determined. We reveal a small wage differential at the beginning of women's career, but women's wages increase more slowly; this is partly due to a lower level of human capital investment by women and partly because firms smooth training costs between different periods.

The Relationship of Returns to Earnings and Cash Flows Before and After Restatement

Restatements create significant problems and uncertainties for the general investors. The goal of this paper is to provide a deeper understanding of how investors use financial statements information to help in their capital allocation decisions. In particular, our study contributes to the body of research on restatements by examining whether investors place more (less) emphasis on cash flows (accruals) after companies restate and how long that relationship may last. We show that after companies restate the association between returns and cash flows increases and the association between returns and earnings decreases. This relation exists for a period of at least one year before the association reverts back to pre-restatement levels. The overall result is consistent with the notion that restatement creates uncertainty and investors question whether future earnings numbers are reliable.

Capital and Risk Revisited: A Structural Equation Model Approach for Life Insurers

AbstractThe role of risk in the capital structure decision of firms is a vast topic in finance. Commonly, models of the interrelationship between risk and capital enumerate as many risk factors as possible by appropriate proxies, with the goal of detailing their individual effects. In this study of the life insurance industry for 1994 through 2000, we take a broader, holistic view of enterprise risk, identifying two groups of insurer risk factors that arise from the major activities of life insurers: investing and underwriting. We call the group of risk factors associated with investing asset risk, and the group associated with underwriting product risk. After specifying other important determinants of capital structure as controls, we allow all other risk factors to find expression in residual error. Within this framework, our focus is to compare two candidate measures for the role of proxy for asset‐related risks. One measure, called regulatory asset risk (RAR), derives from the regulatory tradition of concern with solvency and is related to the C‐1 component of risk‐based capital. The other measure, called opportunity asset risk (OAR), is motivated by traditional finance concerns with market risk and reflects volatility of returns. Product‐related risks are proxied by underwriting exposures in different product lines. We employ structural equation modeling (SEM), which uses longitudinal factor analysis. SEM is an innovative technique for such studies, in dealing effectively with multiple structural equations, autocorrelated panel data, unobserved underlying factors, and other issues that are not simultaneously addressed in other methodologies. We find that RAR and OAR are not equivalent proxies for asset risks. Although overlapping to some extent, each illuminates different aspects of the asset risk–capital interrelationship. In particular, RAR does not seem to affect the capital structure decision of small firms, although OAR does. We interpret this to suggest that small firms as a whole are not as sensitive in their capital decisions to the proxy of regulatory concerns as to the proxy of market opportunity. This contrasts with large insurers, for whom both RAR and OAR have significant effects on capital that comport with the finite risk hypothesis. More detailed analysis suggests that the lack of effect of RAR for small insurers may result from RAR's proxying some factors that induce finite risk for part of the small insurer sample, and other factors that favor the excessive risk hypothesis.

Uncertainty of Future Performance: The Impact of Labor Investment and Labor Flexibility

Abstract: Theory suggests that human capital investment decreases in response to an increase in the riskiness of the return on the investment which suggests a link between the uncertainty of future performance and investments in labor. While labor investment has been the subject of numerous academic studies, the notion of labor flexibility is a relatively new research issue and is of fundamental interest due to the rise of contingent labor in our competitive global economy. In this study, we investigate the relations between fixed labor investments, labor flexibility and their impact on future earnings uncertainty while controlling for capital and R& D investment. The empirical analysis compares the relative contributions of current investments in labor, labor flexibility, R&D and PP&E to future earnings variability using a sample of roughly 20,000 firm-year observations from 1970-1999. We perform extensive robustness checks and provide strong results consistent with our predictions that fixed labor investments increase the uncertainty of future earnings. In contrast, labor flexibility reduces uncertainty in future benefits. Our results have implications for management's human capital operating decisions and are consistent with the extraordinary growth in contingent employment arrangements in the United States and abroad.

Earnings Quality Based on Corporate Investment Decisions

This paper examines a new approach of measuring earnings quality based on firms' capital and labor investment decisions. More specifically, I measure earnings quality as the contemporaneous association between the changes in the level of capital and labor investment and the change in reported earnings. The approach relies on the following intuition: (1) firms make investment decisions based on the net present value (NPV) of the investment projects; and (2) a reported earnings with higher quality (i.e., it is closer to the permanent earnings or the annuitized NPV) should be more associated with the real investment decisions. I find that the measures of earnings quality based on managerial labor and capital decisions are positively correlated with earnings persistence and have incremental explanatory power relative to the earnings quality measures used in the literature.

Network triads: transitivity, referral and venture capital decisions in China and Russia

This article examines the effects of dyadic ties and interpersonal trust on referrals and investment decisions of venture capitalists in the Chinese and Russian contexts. The study uses the postulate of transitivity of social network theory as a conceptual framework. The findings reveal that referee–venture capitalist tie, referee–entrepreneur tie, and interpersonal trust between referee and venture capitalist have positive effects on referrals and investment decisions of venture capitalists. The institutional, social and cultural differences between China and Russia have minimal effects on referrals. Interpersonal trust has positive effects on investment decisions in Russia.

Interscholastic Athletics and Investment in Human Capital*

Objectives. Several studies, such as Hoberman (1997) and Leeds (2003), have claimed that success in the athletic arena has distorted the human capital decisions of young black men. We test this hypothesis by determining how participation in interscholastic athletics affects the study habits of black and white youths.Methods. We build a theoretical model that allows youths to invest in athletic or academic human capital. We test this model using data from the National Educational Longitudinal Survey and accounting for possible self‐selection bias.Results. We find that athletic participation does not have a statistically significant impact on the amount of time young black men and women spend studying. The impact for young white men and women is positive and significant, though the impact of playing football and basketball does have a negative impact for young white men.Conclusions. Participating in interscholastic athletics does not have the pervasive negative impact on young black men that Hoberman (1997) and Leeds (2003) claim. The expected negative impact of basketball and football—the so‐called money sports—exists for young white men, though this is offset by the positive impact of participation in athletics per se.

Improving Comprehension of Capital Sentencing Instructions

Previous research has demonstrated that judicial instructions on the law are not well understood by jurors tasked with applying the law to the facts of a case. The past research has also shown that jurors are often confused by the instructions used in the sentencing phase of a capital trial. The current research tested the effectiveness of a “debunking” approach to improving juror misunderstanding associated with capital sentencing instructions. Participants were randomly assigned to hear either Florida's pattern instructions used in the penalty phase of a capital trial or the same instructions with additional statements that mentioned and refuted misconceptions thought to be associated with established areas of miscomprehension. After participants heard the judicial instructions, their understanding of the law on capital punishment decision making was assessed. The results revealed that comprehension was higher for participants exposed to the bias-refutation statements than for participants who were exposed to only the pattern instructions.

An analysis of fixed capital formation in South Africa since 1994

Fixed capital formation (investment) is an important but generally volatile component of aggregate spending. It is important in that it adds to the productive capacity of an economy. It is value-adding in the sense that it contributes to the growth potential of an economy, but it tends to be volatile as it entails substantial capital commitments based on uncertain expectations. The article undertakes a comparative analysis of fixed capital expenditure, using 1994 as an important year in which South Africa entered a new political dispensation. The article will attempt to evaluate the extent to which fixed capital decisions responded to a changing economic and political environment in terms of expectations and uncertainty.