Excess Profits Research Articles

Bank Fundamentals, Executive Compensation and Public Perception of Banks in Australia

Public perception of banks in Australia is relatively poor compared to firms in other major services sectors. This study explores a number of potential sources of negative public opinion. We find that bank profits are similar to firms in other sectors after adjustment for firm size. Average bank executive remuneration as a proportion of total staff costs are also lower than those in other sectors. Finally, Australian banks not only pay a higher average effective tax rate than their counterparts in OECD countries but are also closest to their statutory corporate tax rates. Our findings therefore suggest that poor public perception of banks is based on the flawed claims of generating excessive profits, overpaying bank executives, and underpaying taxes and is not justified.

La reforma tributaria de 1935 y el fortalecimiento de la tributación directa en Colombia

En este artículo se estudian los elementos más relevantes de la reforma tributaria propuesta y puesta en práctica por el presidente Alfonso López Pumarejo en 1935, durante su primera gestión de gobierno. La reforma fue implementada fundamentalmente mediante la Ley 78 de 1935 y complementada por medio de la Ley 63 de 1936. Se trata de uno de los importantes cambios realizados durante el período de la denominada “revolución en marcha”. Uno de los elementos más relevantes de la reforma fue la consolidación y fortalecimiento de los impuestos directos en Colombia utilizando como instrumentos principales el incremento del impuesto a la renta y la creación de los impuestos al exceso de utilidades y al patrimonio. Los nuevos recursos fiscales obtenidos constituyeron una importante fuente de financiamiento del programa integral de reformas y políticas propuestas por el Gobierno lopista.

Profits and Economic Development

Are rents, or excess profits, good for development? Using industry-level manufacturing data, this paper demonstrates a negative effect of rents, measured by the mark-up ratio, on productivity growth. The negative effect is strongest in poor countries, suggesting that high profits stymie economic development rather than enable it. Consistent with the rent-seeking mechanism of our model, we find that high rents are associated with a slower reduction in tariffs. A country’s average mark-up in manufacturing is a strong negative predictor of future economic growth, indicating that we may be measuring a phenomenon of the broader business environment.

Financial Intermediaries in the Midst of Market Manipulation: Did They Protect the Fool or Help the Knave?

We examine a fund manager's alleged manipulation of platinum and palladium futures settlement prices. Using benchmarks from parallel electronic markets, we find that the manager’s market-on-close trading causes significant settlement price artificiality. Defying predictions that competition among floor traders should limit any artificiality, the artificiality increases in the second half of the alleged manipulation period. Between 35% and 52% of the latter-period artificiality is directly attributable to noncompetitive floor prices. Inflated floor volume contributes a similar proportion to artificiality via the exchange’s trade-weighted settlement price formula. We estimate that floor counterparties reaped more than $6.0 million in excess profits.

Political connections of the boards of directors and department of defense contractorsʼ excessive profits

Despite fast-growing interest in research on political connections, most papers on this topic belong to the economics or public administration fields. Few studies, if any, look into the role of firmsʼ political connections in the Department of Defense (DoD) acquisition area. This paper attempts to bridge this gap by investigating the impact of political connections on the excessive profitability of DoD contractors. We find that, in contrast to what the “corruption hypothesis” predicts, the excessive profits are less (more) pronounced for those contractors with politically connected (non-connected) boards. Our findings suggest that those politically connected board directors may use their experience to serve a benevolent role to the public in keeping DoD contractors from opportunistic profitseeking behaviors that could reach or even cross the federal governmentʼs regulatory redline.

Pairs Trading with Opportunity Cost

Pairs trading is a trading strategy which is used very frequently in the financial industry. An investment opportunity arises when the spread between two assets, which historically have exhibited autoregressive behavior, deviates from its recent history. In this case, the investor takes a long position in the asset which is expected to outperform going forward and finances this by taking a short position in the other one. If the spread converges, the investor can close both positions to generate a profit. We model the spread between two assets as an Ornstein-Uhlenbeck process and assume a constant opportunity cost. We then study the optimal liquidation strategy for an investor who wants to optimize profit in excess of the opportunity cost. Including this cost is important from an applied perspective, as the performance of any investment is always evaluated relative to the performance of the opportunity set.

Pairs Trading with Opportunity Cost

Pairs trading is a trading strategy which is used very frequently in the financial industry. An investment opportunity arises when the spread between two assets, which historically have exhibited autoregressive behavior, deviates from its recent history. In this case, the investor takes a long position in the asset which is expected to outperform going forward and finances this by taking a short position in the other one. If the spread converges, the investor can close both positions to generate a profit. We model the spread between two assets as an Ornstein-Uhlenbeck process and assume a constant opportunity cost. We then study the optimal liquidation strategy for an investor who wants to optimize profit in excess of the opportunity cost. Including this cost is important from an applied perspective, as the performance of any investment is always evaluated relative to the performance of the opportunity set.

Mispricing and Trading Profits in Exchange-Traded Notes

This article investigates whether a simple long–short weekly trading strategy based on mispricing among exchange-traded notes (ETNs) generates profits in excess of the S&P 500 Index over the sample period of June 6, 2006 to January 30, 2012. Ignoring transaction costs, liquidity, and short-selling constraints, the authors find the following: 1) Mispricing is prevalent among ETNs. They enter into 90 trades over our 295-week period using a mispricing threshold of 5% and requiring a minimum average daily volume of 20,000 shares. 2) Total returns to the authors’ strategy are significantly higher than the S&P 500, which had a total return of 3.70% over the same period. The strategy generated total returns ranging from 9% to 110% over a mispricing threshold range of 8% to 14%, depending on the study’s minimum daily trading volume requirements. 3) Nearly all the trades and all the profits from this strategy come from the short side of the portfolio. This is consistent with previous empirical work demonstrating that ETNs are more likely to be overpriced than under priced.

Motor fuel prices in Turkey

The world׳s most expensive motor fuel (gasoline, diesel and LPG) is sold most likely in the Republic of Turkey. This paper investigates the key issues related to the motor fuel prices in Turkey. First of all, the paper analyses the main reason behind high prices, namely motor fuel taxes in Turkey. Then, it estimates the elasticity of motor fuel demand in Turkey using an econometric analysis. The findings indicate that motor fuel demand in Turkey is quite inelastic and, therefore, not responsive to price increases caused by an increase in either pre-tax prices or taxes. Therefore, fuel market in Turkey is open to opportunistic behavior by firms (through excessive profits) and the government (through excessive taxes). Besides, the paper focuses on the impact of high motor fuel prices on road transport associated activities, including the pattern of passenger transportation, motorization rate, fuel use, total kilometers traveled and CO2 emissions from road transportation. The impact of motor fuel prices on income distribution in Turkey and Turkish public opinion about high motor fuel prices are also among the subjects investigated in the course of the study.

Modelling how much extra motorists pay on the road? A cross-sectional study of profit margins of unleaded petrol in Australia

Gross profitability margin (difference between retail and wholesale prices) for unleaded petrol exhibits substantial variations across 108 cities, towns and regional centres in Australia. This paper examines if such variations (averaged during 2007–2012) can be explained by (a) transport costs proxied by the distance between retailers and wholesalers; (b) the size of the retail market; (c) market competition proxied by the number of cars in the vicinity of the retailers; (d) dummy variables capturing other qualitative attributes associated with the retailers’ locations. Three cross-sectional regressions are estimated but only one successfully passes all diagnostic tests. By identifying a number of locations exhibiting excessive profit margins, the results of this paper enhance the efficiency and transparency of petrol pricing in the retail market. It is found that the extent of excessive profiteering in Western Australia (WA) and South Australia (SA) were lower than other Australian states and territories. This important finding can be explained by a strong presence of independent petrol stations in SA and the successful price-monitoring performance of FuelWatch in WA.

Should the US Dictate World Tax Policy? Reflections on PPL Corporation v. Commissioner

The Supreme Court’s decision to grant certiorari in the PPL case offers it a unique opportunity to change the law regarding foreign tax credits that has significantly impeded the ability of other countries to engage in meaningful tax reform. In 1938, the Court said in dicta that to qualify for the foreign tax credit a tax had to be an income or excess profits tax (or a tax imposed in lieu thereof) under US tax principles. This statement has led to an elaborate set of regulations defining what is an income tax, which has significantly hampered the ability of foreign countries to adopt tax reforms for fear that their taxes would not be creditable. It is time for the Court to declare that any tax whose burden falls on the taxpayer, i.e. any direct tax, is a creditable tax, and do away with the cumbersome structure of the IRC section 901 regulations.

Valuation of Lease Contracts with a Price Adjustment Option: An Application to the Maritime Transport Industry

In volatile lease markets, a fixed rate contract may allow one contract party to gain excessive profits while letting the other party face substantial losses. The flexibility in adjusting the contract rate can help address this issue and maintain a fair long-term relationship. This article models and prices the flexibility using real options and derives the boundary of option exercise to facilitate the optimal decision on the rate adjustment. The proposed method is applied to time charter contracts in the maritime transport industry. Moreover, the level of flexibility can be tailored to meet different budgets for the flexibility.

国有企业垄断扩张对企业绩效影响效应研究—来自我国上市公司面板数据的实证

本文以经济增加值为公司绩效的度量指标，采用面板数据模型研究企业绩效与企业垄断扩张间的关系。并应用我国沪深上市公司数据样本，对国有企业的不断扩张和企业绩效的关系进行实证。寻求国企垄断扩张的适度规模，给政策制定者提供参考。实证结果表明：国企垄断扩张使企业绩效呈显著地下降趋势。同时存在非线性的“U型”效应，即较低程度的垄断限制了企业的创新能力，导致企业绩效降低。随着垄断扩张为企业带来的超额垄断利润弥补了创新能力的不足，又使企业绩效与垄断呈现正向关系。In this paper, we choose economic value added (EVA) as the measurement indicator of company’s performance and use the panel data model to study the relationship between the enterprise per-formance and the industry monopoly. We focus on China listing corporations covering various in-dustries and find out that there is a negative linear relation and non-linear “U” effect between the monopoly expansion of state-owned enterprises and EVA; that is to say, the monopoly decreases EVA of the company. However, when the monopoly expansion of state-owned enterprises increases to a certain transition point, EVA begins to increase, indicating that the excess monopoly profit compensates for the negative effect to enterprise. The firm performance and monopoly begin to show a positive relationship.

Market Efficiency and Returns to Simple Technical Trading Rules: New Evidence from U.S. Equity Market and Chinese Equity Markets

Numerous studies in the finance literature have investigated technical analysis to determine its validity as an investment tool. This study is an attempt to explore whether some forms of technical analysis can predict stock price movement and make excess profits based on certain trading rules in markets with different efficiency level. To avoid using arbitrarily selected 26 trading rules as did by Brock, Lakonishok and LeBaron (1992) and later by Bessembinder and Chan (1998), this paper examines predictive power and profitability of simple trading rules by expanding their universe of 26 rules to 412 rules. In order to find out the relationship between market efficiency and excess return by applying trading rules, we examine excess return over periods in US markets and also compare the excess returns between US market and Chinese markets. Our results found that there is no evidence at all supporting technical forecast power by these trading rules in US equity index after 1975. During the 1990's break-even costs turned to be negative, -0.06%, even failing to beat a buy-holding strategy in US equity market. In comparison, our results provide support for the technical strategies even in the presence of trading cost in Chinese stock markets.

THE EFFICIENT MARKET HYPOTHESIS: A CRITICAL REVIEW OF LITERATURE AND METHODOLOGY

The development of the capital markets is changing the relevance and empirical validity of theefficient market hypothesis. The dynamism of capital markets determines the need for efficiency research. The authors analyse the development and the current status of the efficient market hypothesis with an emphasis on the Baltic stock market. Investors often fail to earn an excess profit, but yet stock market anomalies are observed and market prices often deviate from their intrinsic value. The article presents an analysis of the concept of efficient market. Also, the market efficiency evolution is reviewed and its current status is analysed. This paper presents also an examination of stock market efficiency in the Baltic countries. Finally, the research methods are reviewed and the methodology of testing the weak-form efficiency in a developing market is suggested.

What economic support is needed for Arctic offshore wind power?

Abstract Wind power is increasingly being installed in cold climates and in offshore locations. It is generally recognised that installing wind power to offshore locations is more expensive than onshore. The additional challenges from Arctic conditions with annual sea icing are still poorly known. We reviewed the existing knowledge of offshore wind power costs and developed a calculation model for the economics of offshore wind turbines in Finland, including taxes and sea base rent, to obtain a base case for determining the required tariff support. The model was tested with different production and cost rates to obtain a tariff price, which would make offshore wind power on Finnish territory economically viable for the producer. The main developers of planned offshore projects in Finland were interviewed to obtain a comparison between the created model and industry expectations. The cost of erected turbines was estimated to be 2750 €/kW. With this cost of capacity, it was clear that a higher than the current tariff price (83.5 €/MWh) will be required for offshore developments. Our analysis indicated a price level of about 115 €/MWh to be required. We found that even rather small changes in cost or production rates may lead to excess profits or economic losses and further research and pilot projects are required to define a more reliable tariff level.

Complexity, Knowledge Asymmetry, and Monopolistic Competition The Case of Retail Structured Product Market

This paper introduces a monopolistic competition model containing retail investors with imperfect knowledge and issuers offering complex structured products. The model, for which we provide empirical evidences supporting the issuer’s profiteering by increasing the product complexity, can explain that knowledge asymmetry is the key for the issuer to offer complex product and to enjoy the higher excess profit, thus worsening allocative efficiency. Our empirical analysis reports monotonically increasing mark-up premia, and J-shaped issue amounts with respect to complexity: the former result could be explained in a rational framework considering issuer costs, however, the latter is not the case. Our model proves the empirical results are well explained when knowledge asymmetry between issuer and investors is a strictly increasing convex function of complexity.

The profitability of electricity generating firms and policies promoting renewable energy

Using a cross-country firm-level dataset this study empirically analyses how the implemented renewable electricity promotion systems – Tradable Green Certificates vs. Feed-in-Tariffs – affected the profitability of the electricity production sector in Europe during the 2002–2010 period. In particular, it tests the hypothesis that due to market imperfections, namely because of higher investment risk, higher capital constraints and higher transaction costs, TGC schemes will be associated with excess profits for renewable electricity generating firms. The results somewhat support this hypothesis, showing that electricity generating firms, operating in EU countries that implemented TGC, were more profitable compared to FIT firms.

Evolutionary Game Analysis on Stakeholders Cooperation of Wind Power Integration

Large scale integration of renewable is still very challenging due to their intermittency and fluctuations. Aimed at this problem, this paper establishes an evolutionary game model to analysis the dynamic evolution of interests cooperation between the wind farms corporations and the power grid corporations. Then, this paper discusses the relation between multiple variables, such as price of the conventional energy power rate of the subsidy marginal cost of the initial invention and coefficient of distribution of excessive profit, and also analysis how these variables affect the Evolutionary results of this system, based on different replicator dynamics and evolutionary stable strategies. Being at the end, this paper has identified a fair and reasonable distribution coefficient of excessive profit. After equilibrium analysis, a win-win operating mechanism was established to guide the various stockholders to tend to co-operation correctly. Finally, some countermeasures and suggestions were proposed for wind power integration.

Harmful Tax Competition: Six Belgian Tax Incentives under the Microscope

In today's globalized environment, tax motives have begun to play an increasingly prominent role in a company's (re)location decision. Because of this development, national states have to ensure that their tax systems remain competitive in order to attract new investments (and the corresponding taxable income). However, in doing so, they should refrain from introducing tax measures which qualify as harmful tax competition, since these may have potential negative effects on the tax base of other states. The Organisation for Economic Co-operation and Development's (OECD's) 1998 Report on 'Harmful Tax Competition: An Emerging Global Issue' and the European Commission's Code of Conduct on business taxation both aim to curb harmful tax practices by establishing the criteria which can be used to identify harmful preferential tax regimes. In addition, the state aid provisions can be used to fight harmful tax competition. The purpose of this article is to evaluate six Belgian tax incentives in search of any potentially harmful features. As will be demonstrated below, it appears there are still a number of loopholes in the current state of legislation, which mainly relate to the special tax regime for expatriates and the excess profit ruling system.