Higher Marginal Value Research Articles

RETURNS TO INVESTORS IN STOCKS IN NEW INDUSTRIES

I. INTRODUCTION One thousand dollars invested in America Online's initial public offering (IPO) in March 1992 became $295,545 by the end of 2000 when AOL was purchased by Time-Warner. This is an extraordinary payoff for shareholders: over 5% per month. While this investment has an outstanding return, new industries have high risk and their stocks are likely to have high expected returns. On the other hand, the extraordinary behavior of dot-corn stocks makes this conclusion less than obvious. The stratospheric prices of dot-corn stocks and returns to some shareholders suggest that expected returns in a new industry may well be dominated by forces not common in more mature industries. One possibility is euphoria or craziness, an explanation given more plausibility by the boom and bust in dot-corn stock prices. Another explanation is that such stocks are similar to options and lottery tickets. This possibility has occurred to many observers, among them Alan Greenspan who observed that When you are dealing with stock the possibilities of which are either it's going to be valued at zero or some huge number--you get a premium in that stock price which is exactly the same sort of price evaluation process that goes on in the lottery. --(Blumberg Capital 1999) Perhaps stocks in new industries have a distribution of returns that includes the possibility of large gains and small losses? If so, then investors may buy stocks for the same reasons that people are willing to pay for lottery tickets. This explanation could be consistent with high valuations and even negative-expected returns because investors are willing to pay on average to have a small probability of a large gain. (1) Indeed, the limited history of dot-corns suggests realization of substantial negative returns. The geometric return to shareholders averaged across dot-coms is --4.3% per month. Even so, the history of dot-coms probably is too short to deliver very reliable evidence on the expected return in new industries. This average return to stockholders is based on the same firms as in the study by Hand (2001), but there are only five firms in the Center for Research in Security Prices (CRSP) data for these firms as recently as 1995 and the financial crisis of 2007 and 2008 would suggest ending the data in 2006. We estimate expected returns in new industries by examining new industries with longer experiences than dot-coms. Many analogies have been drawn between dot-coms and earlier industries as far back as railroads and telegraphs, for example, in Business Week (Mandel 1999; Hof and Hamm 2002), the Economist (2000), Nairn (2002), and Perez (2002). (2) Among these analogies is the importance of network effects. Network effects are important for dot-coms and they are important for some of the industries examined in this paper. Industries examined in this paper include network industries if a network industry is defined as one in which a standard for the product or the availability of complementary inputs has high marginal value for the industry. One such industry is the automobile industry, which standardized on gasoline engines instead of electricity or steam. Another is the telegraph industry, for which interconnection is as crucial as for the Internet. While it is less obvious, interconnection is an important issue for railroads as well. When differences in track width--gauge--are large enough, connections across lines can require unloading and reloading railroad cars. Gauge was not standardized in the United States until the 1880s and even today, gauge in Spain and Portugal is different than in the rest of Europe. In this paper, we examine the returns in major, new industries in the United States and summarize the distribution of returns over the period of the industry's development. Our paper is related to papers by Fama and French (2001) and Gompers and Lerner (2003). Fama and French (2001) examine the returns on newly listed firms in the CRSP data set from 1926 to 2000 and find that these firms' returns are similar to their benchmark returns. …

Optimizing reproductive phenology in a two-resource world: a dynamic allocation model of plant growth predicts later reproduction in phosphorus-limited plants.

Timing of reproduction is a key life-history trait that is regulated by resource availability. Delayed reproduction in soils with low phosphorus availability is common among annuals, in contrast to the accelerated reproduction typical of other low-nutrient environments. It is hypothesized that this anomalous response arises from the high marginal value of additional allocation to root growth caused by the low mobility of phosphorus in soils. To better understand the benefits and costs of such delayed reproduction, a two-resource dynamic allocation model of plant growth and reproduction is presented. The model incorporates growth, respiration, and carbon and phosphorus acquisition of both root and shoot tissue, and considers the reallocation of resources from senescent leaves. The model is parameterized with data from Arabidopsis and the optimal reproductive phenology is explored in a range of environments. The model predicts delayed reproduction in low-phosphorus environments. Reproductive timing in low-phosphorus environments is quite sensitive to phosphorus mobility, but is less sensitive to the temporal distribution of mortality risks. In low-phosphorus environments, the relative metabolic cost of roots was greater, and reproductive allocation reduced, compared with high-phosphorus conditions. The model suggests that delayed reproduction in response to low phosphorus availability may be reduced in plants adapted to environments where phosphorus mobility is greater. Delayed reproduction in low-phosphorus soils can be a beneficial response allowing for increased acquisition and utilization of phosphorus. This finding has implications both for efforts to breed crops for low-phosphorus soils, and for efforts to understand how climate change may impact plant growth and productivity in low-phosphorus environments.

Financial Intermediaries and the Cross-Section of Asset Returns

Financial intermediaries trade frequently in many markets using sophisticated models. Their marginal value of wealth should therefore provide a more informative stochastic discount factor (SDF) than that of a representative consumer. Guided by theory, we use shocks to the leverage of securities broker-dealers to construct an intermediary SDF. Intuitively, deteriorating funding conditions are associated with deleveraging and high marginal value of wealth. Our single-factor model prices size, book-to-market, momentum, and bond portfolios with an R2 of 77% and an average annual pricing error of 1% — performing as well as standard multi-factor benchmarks designed to price these assets.

The Impact of Financial Flexibility on Capital Structure Decisions: Some Empirical Evidence

I empirically test the impact of financial flexibility on capital structure decisions on a large sample of publically traded U.S. firms from 1971 to 2006. I find that accounting for the marginal value of financial flexibility in capital structure models sheds light on several important capital structure questions. First, I show that when the marginal value of financial flexibility is high, variables traditionally shown to impact leverage (e.g., profitability, depreciation and amortization expense, fixed assets, etc.) become less important and explain less of the observed variation in leverage. This is consistent with the notion that financial flexibility is of first-order importance when firms make capital structure decisions. Second, consistent with the predictions of DeAngelo, DeAngelo, and Whited (2010), the results show that firms that have a high marginal value of financial flexibility tend to preserve debt capacity in the current period but are significantly more likely to embark on intentional, but temporary, deviations from their target leverage ratios in the near future. Further, firms which have a high marginal value of financial flexibility that do raise large amounts of financing in the current period are significantly more likely to issue equity than transitory debt in order to preserve debt capacity. This result helps to explain why young, high-growth firms tend to have lower debt ratios than the pecking order or traditional tradeoff models predict. Finally, I show that once the marginal value of financial flexibility is included in a dynamic partial adjustment model, it explains the asymmetric adjustment speeds reported by Byoun (2009). That is, I show that it is only the firms with the highest marginal value of financial flexibility that tend to be reluctant to lever up when they have below their target leverage. Overall, my results highlight the need to account for the marginal value of financial flexibility in empirical tests of capital structure theory.

Mechanism Design for 'Free' But 'No Free Disposal' Services: The Economics of Personalization under Privacy Concerns

Online personalization services belong to a class of economic goods with no-free-disposal (NFD) property, where due to privacy concerns more services is not always preferred to less. We examine vendor strategies for a market with heterogeneous consumers and where the vendor can also buy information through coupons or side-payments. Counter to intuition our results suggest that the market is covered in all cases when a variable services-only contract is offered and in some cases (vendor has high marginal value for information) when a variable services-coupon strategy is pursued. Interestingly in the former case consumer surplus is maximized even if the vendor is a monopolist and the market is never covered under fixed services strategy. However, under both fixed services-only and services-coupon strategies the vendor serves the same subset of the market even if producer, consumer and social welfare are all higher with coupons. When the market is served by a vendor with a not-so-high marginal value for information, the optimal strategy is a bunched-solution. This solution is superior to all other contracts such that convenience-seekers receive a services-coupon menu, intermediate types get a fixed-services contract while others (with the highest privacy costs in the market) are not served. Interestingly, our results recommend that it is optimal for the vendor to offer coupons to consumers who value personalization over privacy; this is counter to the commonly-held view that couponing is effective as a tool to attract privacy-seekers in the market.

Analysing the social benefits of soil conservation measures using stated preference methods

The paper estimates the benefits of programmes to mitigate the off-site impacts of soil erosion for a watershed in Andalusia, Spain. Two stated preference methods are used, namely choice experiments and contingent valuation, to obtain estimates of the social benefit from soil erosion reductions under two different methodologies. We emphasise the relative merits of the choice experiment method to provide useful inputs to policy design. However, employing both methods allows us to undertake a convergent validity test and thus to provide more defensible social benefit estimates. The attributes used in the choice experiment include water quality impacts (which we find to have the highest marginal values), impacts on wildlife and the area subject to a control programme. The contingent valuation design includes an attempt to reduce bias by reminding respondents about substitutes. Results are used to suggest upper limits on per hectare payments for soil conservation programmes.

Are NBA Fans Becoming Indifferent to Race? Evidence From the 1990s

Previous work found the racial composition of NBA teams to be positively correlated with the racial composition of their metropolitan markets in the 1980s. We find continued evidence of this relationship during the 1990s, with accompanying revenue gains from the inclusion of White players on teams located in whiter areas. And, as the number of White players declined significantly throughout the decade, the revenue product of a White player actually increased on the margin. The tendency for top-performing White players in the NBA to locate in cities with larger White populations also is consistent with their higher marginal value in such locations.

Universities as partners in U.S. research joint ventures

This paper investigates the conditions when a research joint venture (RJV) will involve a university as a research partner. We hypothesize that larger RJVs are more likely to invite a university to join the venture as a research partner than smaller RJVs because larger ventures are less likely to expect substantial additional appropriability problems to result because of the addition of a university partner and because the larger ventures have both a lower marginal cost and a higher marginal value from university R&D contributions to the ventures’ innovative output. We test this hypothesis using data from the COoperative REsearch (CORE) database, and those data confirm the hypothesis.

The marginal values of noise disturbance from air traffic: does the time of the day matter?

This paper analyzes the marginal willingness to pay for changes in noise levels related to changes in the volume of flight movements at a city airport in Stockholm, Sweden, by using a choice experiment. When estimating marginal willingness to pay for different times of the day and days of the week, we find that these vary with the temporal dimensions: mornings and evenings have higher marginal values. Interestingly, a substantial proportion of the respondents prefer no changes in the current noise level. The paper concludes with a policy discussion related to incentive-based pricing.

CLIMATIC CHANGE AND U.S. WATER RESOURCES: FROM MODELED WATERSHED IMPACTS TO NATIONAL ESTIMATES1

ABSTRACT: Water is potentially one of the most affected resources as climate changes. Though knowledge and understanding has steadily evolved about the nature and extent of many of the physical effects of possible climate change on water resources, much less is known about the economic responses and impacts that may emerge. Methods and results are presented that examine and quantify many of the important economic consequences of possible climate change on U.S. water resources. At the core of the assessment is the simulation of multiple climate change scenarios in economic models of four watersheds. These Water Allocation and Impact Models (Water‐AIM) simulate the effects of modeled runoff changes under various climate change scenarios on the spatial and temporal dimensions of water use, supply, and storage and on the magnitude and distribution of economic consequences. One of the key aspects and contributions of this approach is the capability of capturing economic response and adaptation behavior of water users to changes in water scarcity. By reflecting changes in the relative scarcity (and value) of water, users respond by changing their patterns of water use, intertemporal storage in reservoirs, and changes in the pricing of water. The estimates of economic welfare change that emerge from the Water‐AIM models are considered lower‐bound estimates owing to the conservative nature of the model formulation and key assumptions. The results from the Water‐AIM models form the basis for extrapolating impacts to the national level. Differences in the impacts across the regional models are carried through to the national assessment by matching the modeled basins with basins with similar geographical, climatic, and water use characteristics that have not been modeled and by using hydro‐logic data across all U.S. water resources regions. The results from the national analysis show that impacts are borne to a great extent by nonconsumptive users that depend on river flows, which rise and fall with precipitation, and by agricultural users, primarily in the western United States, that use a large share of available water in relatively low‐valued uses. Water used for municipal and industrial purposes is largely spared from reduced availability because of its relatively high marginal value. In some cases water quality concerns rise, and additional investments may be required to continue to meet established guidelines.

Quality of life related to fear of falling and hip fracture in older women: a time trade off study.

To estimate the utility (preference for health) associated with hip fracture and fear of falling among older women. Quality of life survey with the time trade off technique. The technique...

A Value-Driven System for Autonomous Information Gathering

This paper presents a system for autonomous information gathering in an information rich domain under time and monetary resource restrictions. The system gathers information using an explicit representation of the user's decision model and a database of information sources. Information gathering is performed by repeatedly selecting the query with the highest marginal value. This value is determined by the value of the information with respect to the decision being made, the responsiveness of the information source, and a given resource cost function. Finally, we compare the value-driven approach to several base-line techniques and show that the overhead of the meta-level control is made up for by the increased decision quality.

Consequences of differences in pricing systems between regions on economic values and revenues of a national dairy cattle breeding scheme in Italy

Abstract Profit equations were used to determine the relative importance of different milk yield traits, with and without product limitations. Economic values were calculated for three different Italian payment systems: the ‘average’ payment system employed by Unalat [Unalat, 1995. Accordo interprofessionale per la determinazione del prezzo del latte per il periodo dal 1/4/1994 al 31/3/1995. Roma, Italy. p. 10 (personal correspondence).], payment system in areas of Parmesan cheese production, and the payment system that is used in deriving the current economic weights. The Parmesan payment system resulted in the highest marginal value of milk with average composition in situations without herd output limitation. With a herd output limitation considering milk yield and fat content, marginal value decreased by 47 to 52%. The economic value of fat relative to that of protein ranged from −0.031 to 0.135 without herd output limitation and −0.432 to −0.020 with herd output limitation. The relative economic value of carriers ranged from −0.012 to 0.07 without and −0.020 to 0.042 with herd output restriction. The sensitivity analysis revealed that the average herd yield levels for fat, and especially protein, are the main factors influencing the relative economic values. Losses, which occurred from an economic response of a breeding scheme due to changes in payment systems or herd output limitation, were quantified. Without herd output limitation, the loss due to changes in pricing systems ranged from 4.2 to 16.7%, whereas with the herd output limitation losses up to 57.0% were found. Losses in economic response to selection indicated that there is potential for diversification of the breeding goal. The benefits of diversification at the population level have to be balanced against the costs of running a larger selection programme in deciding on a longer-term selection policy.

Planning, Stochastic Shocks and Labour Contracts of Female Workers and Their Welfare Implications

In this paper we analyse labour contracts for female workers when there are planned shifts or stochastic shocks to their leisure preference which arise as a result of planned or unplanned pregnancy. It will be shown that, when female workers plan their pregnancy, contract firms can induce self-selection among workers through a contract that stipulates a wage profile steeper than the spot wage profile so that self-selected workers who accept the contract will not quit. Even though information on shifts in leisure preference is asymmetric, first-best efficiency can be achieved through self-selection. When female workers do not plan childbirths, however, self-selection contracts are not possible. When the stochastic shocks are realized, there will be quits. Planning is Pareto-superior to no planning. At equilibrium workers will be allocated optimally; workers who have low marginal value of home time will join contract firms and make specific investments, while those who have high marginal value will seek employment in the Walrasian market and make no specific investments. Some implications of these results are also discussed in the paper.