Dynamic Trade-off Research Articles

Institutional Determinants of Capital Structure Adjustment Speeds

Many authors relate a firm’s performance to legal and political features and the regulatory environment in which it operates. This article compares firms’ capital structure adjustments across countries and investigates whether institutional differences help explain the variance in estimated adjustment speeds. We find that legal and financial traditions significantly correlate with firm adjustment speeds. More narrowly, institutional features also relate to adjustment speeds, consistent with the hypothesis that better institutions lower the transaction costs associated with adjusting a firm’s leverage. Such associations between institutional arrangements and leverage adjustment speeds are consistent with the dynamic trade off theory of capital structure choice.

Corporate Governance and Capital Structure Dynamics

We develop a dynamic tradeoff model to examine the importance of manager-shareholder conflicts in capital structure choice. Using panel data on leverage choices and the model's predictions for different statistical moments of leverage, we show that while refinancing costs help explain the patterns observed in the data, their quantitative effects on debt choices are too small to explain financing decisions. We also show that by adding agency conflicts in the model and giving the manager control over the leverage decision, one can obtain capital structure dynamics consistent with the data. In particular, we find that the model needs an average agency cost of 1.5% of equity value to resolve the low-leverage puzzle and to explain the time series of observed leverage ratios. Our estimates also reveal that the variation in agency costs across firms is sizeable and that the levels of agency conflicts inferred from the data correlate with commonly used proxies for corporate governance.

Menu Pricing and Learning

We address the question of designing dynamic menus to sell experience goods. A dynamic menu consists of a set of price-quantity pairs in each period. The quality of the product is initially unknown, and more information is generated through experimentation. The amount of information in the market is increasing in the total quantity sold in each period, and the firm can control the information flow to the market by adjusting the level of sales. We derive the optimal menu as a function of consumers' beliefs about product quality, and characterize the changes in prices and quantities resulting from information diffusion. The equilibrium menu prices are the result of a dynamic trade-off between immediate gains from trade, information production, and information rents. The firm initially charges lower prices, in order to increase sales above the static optimum, sacrificing short-term gains in order to invest in information. As the market obtains more information, the firm gradually shifts to a policy designed to extract revenue from high-valuation buyers. This policy may eventually exclude low-valuation buyers from the market, even if the product's underlying quality is in fact high.

Menu Pricing and Learning

We analyze the design of dynamic menus to sell experience goods. The quality of the product is initially unknown, and the total quantity sold in each period determines the amount of information in the market. We characterize the optimum menu as a function of consumers' beliefs, and the dynamic adjustments resulting from the diffusion of information. The firm faces a dynamic trade-off between gains from trade, information production, and information rents. It initially charges lower prices, sacrificing short-term revenue to increase sales. As more information is revealed, prices increase, and low-valuation buyers are excluded, even when the product's quality is high. (JEL D42, D82, D83, L12)

Reckless males, rational females: Dynamic trade-off between food and shelter in the marine isopod Idotea balthica

Habitat choice of herbivores is expected to be a resolution of a trade-off between food and shelter. The resolution of this trade-off may, however, be dynamic within a species because distinct phenotypes may value these factors differently and the value may vary temporally. We studied this hypothesis in the marine herbivore Idotea balthica (Isopoda), by simultaneously manipulating both food and shelter, and investigated whether the resolution of the trade-off differed between sexes, colour morphs and day and night (i.e. high and low predation risk). Isopods chose between exposing and concealing backgrounds in which the quantity or quality of food varied. When choosing between the backgrounds in the absence of food, females preferred the concealment more than males did. However, in a trade-off situation the isopods traded shelter for food, and females more so than males. Thus, males' lower preference for the shelter was not counterbalanced by a stronger preference for food. The microhabitat use also differed between night and day showing adaptation to diurnally fluctuating predation risk. We suggest that microhabitat utilization of females is more strongly tied to variation in risk and resources than that of males, for whom other factors, such as seeking mates, may be more important.

Do Firms Have Unique Target Debt Ratios to Which They Adjust?

The estimates of the speed of adjustment to target leverage tend to be significant but low. One interpretation for the slow adjustment is that firms fully adjust to target only infrequently, when the benefits of adjustment exceed its costs. Using both ex-ante and ex-post information to identify situations when the adjustment should be full, we find no evidence of full adjustment. We find that adjustments to target are rarely full, with many firms adjusting beyond or away from the target. The results imply that firms may have target ranges but no unique target debt ratios to which they ever want to fully adjust. One implication of this is that empirical analyses, such as partial adjustment regressions, that rely on the existence of a well-defined target debt ratio may be ill-suited for quantifying the importance of dynamic tradeoff behavior vis-a-vis alternative theories.

A Dynamic Model of Corporate Financing with Market Timing

In this paper, I build a dynamic trade-off model of financing with difference in beliefs between the manager and investors. In the model, investors update more readily on earnings announcements than the manager does. The model offers a parsimonious treatment of endogenous financing, payout, and cash policies. The model generates a broad set of well-documented empirical facts that are difficult to explain using standard theories. In particular, the model predicts: 1) high stock returns predicting equity issuance, 2) the low debt ratios of firms in cross-section, 3) the substantial presence of firms with no debt or negative net debt and the fact that zero-debt firms are more profitable, pay larger dividends, and keep higher cash balances than other firms, and 4) the negative relationship between profitability and both book and market leverage ratios. If investors overextrapolate trends in earnings growth, the model also predicts the negative/positive long-run abnormal returns following stock issuances/repurchases.

A New Model of Short- and Long-term Effects of Exposure to Ionizing Radiation in Hematopoietic System of Human

In this report we present a new model of the hematopoietic system for humans exposed to chronic and acute ionizing radiation (IR). This model is capable of describing both short-term deterministic effects represented by the process of the loss and replacement of cells and long-term stochastic effects such as carcinogenesis. The model combines and further extends the ideas used in: i) models of hematopoietic system as formulated and developed by Mackey and colleagues, and ii) the carcinogenesis model of breaking barrier mechanisms recently developed by our group. The generalized model of hematopoiesis relates the hematopoietic stem cell compartment with all lines of peripheral blood (red blood cells, white cells and platelets). Exposure to IR is described within the one-hit-one target theory, though the generalizations to include more sophisticated approaches as well as bystander effect are discussed. The concept of breaking barrier mechanisms is used to describe carcinogenesis represented as a dynamic trade-off between two antagonistic forces or processes, promoting or hindering carcinogenesis at its different stages (initiation, promotion, conversion). The model was formulated in such a way that it represents the three levels of the organism’s vital organization: i) a cellular level, where the dynamics of the processes of cell kinetics, reparation, and apoptosis, are defined, ii) a level of human organism, where covariates describing health states are measured, and iii) a population, where such characteristics as incidence and mortality rates associated with cancer are predicted. One advantage of the suggested modeling approach is in the possibility of the natural combining of different measurements including age-specific hazard rate and measures, characterizing fractions of cells with breaking barriers. Another advantage is in the broad spectrum of areas of potential applications, including: i) further investigation of mechanisms of health effects induced by IR, i.e., carcinogenesis or reactions of radiosensitive tissues, ii) development of strategies of radiation protection through calculating risks for specific population groups, iii) investigation of normal tissue reaction during radiological treatment in radiation oncology, iv) biodosimetry, v) radiobiology, e.g., investigating IR induced genomic instability, and vi) development of methods of individual prognostication. The model can be estimated using information on characteristics of hematopoiesis and cell damage by IR available in literature. Using the estimated model we performed simulation studies allowing for identification of dose characteristics of acute or chronic exposure for which disorders in hematopoietic systems occur in a certain fraction of the exposed population.

Testing Models of Dynamic Trade Off Theory

Dynamic trade off theory suggests that firms let their leverage ratios vary within an optimal range. I develop an empirical model that estimates how the determinants of capital structure affect the two boundaries that define firms' optimal leverage ranges. Empirical evidence supports the predictions of dynamic trade off theory. Volatility increases the optimal leverage range. Profitability and interest rates reduce the leverage range. Consistent with agency theory, assets in place firms respond sooner to decreases in leverage than do growth firms. I also examine post-adjustment leverage ratios and find that firms under-adjust on average. This suggests proportional adjustment costs play an important role in determining the size of capital structure adjustments.

A Cost of Leadership in Human Groups

AbstractGroup living is the result of a dynamic trade‐off between associated costs and benefits. However, these costs and benefits are not necessarily distributed equally across different spatial positions of groups which may result in different fitness returns for individuals occupying different positions in groups. Here we consider whether leadership of a group during a navigation task in humans may have a specific cost associated with it. Pairs of students performed a counting task whilst walking through two obstacle courses, once as leader and once as follower. We found that leaders made significantly more errors in the counting task than followers suggesting that there is an attention cost associated with leadership/navigation behaviour.

Foreign aid, growth and poverty: A policy framework for Niger

This paper extends the dynamic macroeconomic framework developed by Agénor et al. [Agénor, P. -R., Bayraktar, N., & Aynaoui, K. E. (2006, July). Roads out of Poverty? Assessing the Links between Aid, Public Capital, Growth, and Poverty Reduction. World Bank, Revised.]. As in the original model, linkages between foreign aid, public investment (education, infrastructure, and health) and growth are explicitly captured, but this time in a fixed nominal exchange rate regime. Although the nominal exchange rate is fixed, the relative price of domestic goods is endogenous, thereby allowing for potential Dutch disease effects associated with increases in aid. The impact of policy shocks on poverty is assessed by using partial growth elasticities. A policy experiment of increasing foreign aid illustrates the dynamic trade-offs between growth and poverty reduction in Niger.

The dynamic nature of antipredator behavior: prey fish integrate threat-sensitive antipredator responses within background levels of predation risk

Prey animals often have to face a dynamic tradeoff between the costs of antipredator behavior and the benefits of other fitness-related activities such as foraging and reproduction. According to the threat-sensitive predator avoidance hypothesis, prey animals should match the intensity of their antipredator behavior to the degree of immediate threat posed by the predator. Moreover, longer-term temporal variability in predation risk (over days to weeks) can shape the intensity of antipredator behavior. According to the risk allocation hypothesis, changing the background level of risk for several days is often enough to change the response intensity of the prey to a given stimulus. As the background level of risk increases, the response intensity of the prey decreases. In this study, we tested for possible interactions between immediate threat-sensitive responses to varying levels of current perceived risk and temporal variability in background risk experienced over the past 3 days. Juvenile convict cichlids were preexposed to either low or high frequencies of predation risk (using conspecific chemical alarm cues) for 3 days and were then tested for a response to one of five concentrations (100, 50, 25, 12.5%, or a distilled water control). According to the threat-sensitive predator avoidance hypothesis, we found greater intensity responses to greater concentrations of alarm cues. Moreover, in accordance with the risk allocation hypothesis, we found that cichlids previously exposed to the high background level of risk exhibited a lower overall intensity response to each alarm cue concentration than those exposed to the low background level of risk. It is interesting to note that we found that the background level of risk over the past 3 days influenced the threshold level of response to varying concentrations of alarm cues. Indeed, the minimum stimulus concentration that evoked a behavioral response was lower for fish exposed to high background levels of predation than those exposed to low background levels of predation. These results illustrate a remarkable interplay between immediate (current) risk and background risk in shaping the intensity of antipredator responses.

Do Firms have Target Leverage Ratios? Evidence from Historical Market-To-Book and Past Returns

Several recent empirical studies in the capital structure literature challenge the traditional trade-off theory. Specifically, these studies document that historical market-to-book and past returns can explain cross-sectional leverage. These findings seem to be inconsistent with the existence of a target leverage ratio. In this paper, I show that the historical variables obtain their explanatory power from time-varying target leverage ratios and adjustment costs. The results are more consistent with a dynamic trade-off theory with adjustment costs.

The Dynamic Trade-Off Theory with Real Investment: An Analytical Approach

The Dynamic Trade-Off Theory with Real Investment: An Analytical Approach

Dynamic tradeoffs in the raft‐mediated entry of human immunodeficiency virus type 1 into cells

To initiate an infection human immunodeficiency virus type 1 (HIV-1) particles must first bind to receptors on the surface of their host cells, a process that eventually leads to fusion of viral and cellular membranes and release of the viral genome into the cytoplasm. Understanding the molecular mechanisms of these processes may enable the development of new anti-HIV strategies. Disagreement currently prevails on the role in virus entry of microdomains within the cellular plasma membrane known as lipid rafts. Experiments have suggested that lipid rafts, in their interactions with cellular receptors and viral particles, either promote or have minimal effect on viral entry. Here we develop a dynamic model for HIV-1 entry that enables us to identify and quantitatively assess tradeoffs that can arise from the clustering of receptors in rafts. Specifically, receptor clustering can be detrimental to the initiation of viral infection by reducing the probability that a virus particle finds its primary receptor, CD4. However, receptor clustering can also enable a virus particle, once bound, to rapidly form multivalent interactions with receptors and co-receptors that are required for virus-cell membrane fusion. We show how the resolution of such tradeoffs hinges on the level and spatial distribution of receptors and co-receptors on the cell surface, and we discuss implications of these effects for the design of therapeutics that inhibit HIV-1 entry.

Optimal Bank Capital with Costly Recapitalization

We study optimal bank capital choice as a dynamic tradeoff between the opportunity cost of equity, the loss of franchise value following a regulatory minimum capital violation, and the cost of recapitalization. We introduce a recapitalization delay, which results in a strictly positive probability of capital adequacy violation and qualitatively influences optimal capital raising policies. We calibrate the model to bank accounting return data and evaluate the model's ability to explain observed bank capital ratios. Differences in return volatility explain a significant fraction of the cross-sectional variation in bank capital ratios. Differences in the level of capital market imperfections across banks constitute a secondary explanation. Our analysis points to the need for improved forward looking estimates of bank return volatility.

On-Line Integrated Routing in Dynamic Multifiber IP/WDM Networks

This paper focuses on dynamic integrated routing in multifiber Internet protocol/wavelength-division multiplexing (IP/WDM) networks, which can be implemented through either one-step routing (OSR) or two-step routing (TSR) approach. Based on an extended layered-graph, two resource assignment strategies, termed channel-level balance (CLB) and link-level balance (LLB), are proposed to balance the traffic in the network at different levels. To further improve the performance, a parameter K is introduced to make a dynamic tradeoff between the logical-layer links and the optical-layer links. Simulation studies are carried out for various topologies. The results show that LLB is better than CLB in most cases, and LLB combined with OSR has the optimal performance. Also, we find that the routing approach and the resource assignment strategy individually play different roles with different values of r/sub l/ that is introduced to indicate the resource richness of the network. As a multifiber network is functionally equivalent to a single-fiber network with limited wavelength conversion, we investigate the effects of wavelength conversion by studying the multifiber IP/WDM networks. The analysis shows that, when the granularity of each connection request is much smaller than the wavelength granularity, wavelength conversion may increase the request blocking probability in the network.

PRESERVING TRANSFER BENEFIT FOR PRESENT AND FUTURE GENERATIONS

How should governmental policy be adjusted to guarantee a positive account for each generation, taking into account welfare and equity across age classes? Such a contract depends on the dynamic maintenance of a positive account for every present and future generation and can be achieved by manipulating both pension and education spending. The ensuing dynamic tradeoff between generational benefit and equity implies an optimal interest rate in human capital and attenuates the link that long-term pension sustainability necessarily depends on positive population growth.

Improving trade-offs in manufacturing: Method and illustration

The analysis of trade-offs between competitive priorities is one of the core issues in manufacturing strategy research. However, past studies focused mainly on empirical validation of the trade-off concept. There has been limited research on practical aspects of trade-off management, especially methods for trade-off improvement and the incorporation of trade-off analysis into manufacturing strategy formulation. This study presents a heuristic method for the improvement of manufacturing trade-offs. The method incorporates the concepts of dynamic trade-offs and improvement trajectories into a decision-making process. An example of implementation is given, based on the case of a British manufacturer.

Optimal dynamic law enforcement

In this paper we present an intertemporal extension of Becker's [Journal of Political Economy 76 (1968) 169] static economic approach to crime and punishment. For a dynamic supply of offenders we determine the optimal dynamic trade-off between damages caused by offenders, law enforcement expenditures and cost of imprisonment. By using Pontryagin's maximum principle we obtain interesting insight into the dynamical structure of optimal law enforcement policies. It is found that inherently multiple steady states are generated which can be saddle points, unstable points and boundary solutions. As in other non-linear control models there exists a threshold (a so-called Skiba point) which makes the optimal enforcement policy dependent on the initial conditions. It turns out that above the Skiba point the optimal trade-off between social costs implies a steady state with a high level of offences, while below the threshold the optimal law enforcement should eradicate crime.