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Capital depreciation and the underdetermination of rate of return: A unifying perspective

Capital depreciation and the underdetermination of rate of return: A unifying perspective

The remainder of the paper is structured as follows. Section 2 supplies some notational conventions. Section 3 selectively systematizes the literature on the rate of return. Section 4 presents the AIRR approach, which is based on the notion of coherence of a rate of return and the notion of Chisini mean. The section introduces the iso-value curve, proves the NPV-consistency of the approach and generalizes AIRR to time-variant COCs in both discrete and continuous time. Section 5 presents AROI, a variant of AIRR, and discusse s the relations with Keynes’s notion of user cost. Section 6 discusses the underdetermination of the rate of return by a cash-flow stream and the notion of depreciation class. Section 7 presents 12 different rates of return related to different depreciation classes, among which are the internal rate of return (IRR) the modified IRR (MIRR), and the average accounting rate, and briefly discusses the economic meaning and the piece of information supplied by each one. Section 8 provides some guidelines for practitioners for singling out the relevant rate of return and presents three numerical applications. Sections 9-11 supply some insights for future research. In particular, section 9 presents a new, more stringent definition of NPV- consistency based on sensitivity analysis and shows that three rates of return, associated with different depreciation classes, possess it in a strict sense; section 10 blends Modigliani and Miller’s well-known results (Modigliani and Miller 1958, 1963; Miller and Modigliani 1961) with the AIRR approach and shows how they can be reframed in terms of rate of return, allowing for time-variant rates of return and finite-lived firms; it also shows that the COC, as well as the project rate of return, is not unique, for it depends on capital depreciation; section 11 discusses the conflict existing between the quest for a capital valuation theory which should be capable of supplying an appropriate notion of capital value in any circumstance and the finding that different depreciation patterns supply different but not mutually exclusive pieces of information that may enrich the economic analysis. Some concluding remarks end the paper.

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Public Capital, Internal Rate of Return and Growth Accounting

Public Capital, Internal Rate of Return and Growth Accounting

As it is well known, there are two general ways of computing the rates of return in a growth accounting exercise: endogenous and exogenously. The exogenous approach assumes that the r´s in [2a] – [2c] should be somehow related to observed market’s nominal rates of interest. On its part, the endogenous approach, making use of some additional assumptions (i.e. constant returns to scale, competitive markets and optimizing behavior), obtains the r´s through equalizing the aggregate value of capital services to the Gross Operating Surplus figures from the National Accounts (GOS NA ). The internal rate of return can be obtained by solving for r t in [3]

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Rational Asymmetric Development, Piketty and Poverty in Africa

Rational Asymmetric Development, Piketty and Poverty in Africa

An April 2015 World Bank report on the Millennium Development Goal poverty target has revealed that extreme poverty has been decreasing in all regions of the world with the exception of Africa. This study extends the implications of Thomas Piketty’s celebrated literature from developed countries to the nexus between developed nations and African countries by building on responses from Rogoff (2014) and Stiglitz (2014), post Washington Consensus paradigms and underpinnings from Solow- Swan and Boyce-Fofack-Ndikumana. The central argument presented is that the inequality problem is at the heart of rational asymmetric development between rich and poor countries. Piketty has shown that inequality increases when the return on capital is higher than the growth rate, because the poor cannot catch-up with the rich. We argue that when the return on political economy (or capitalism- fuelled illicit capital flight) is higher than the growth rate in African countries, inequality in development increases and Africa may not catch-up with the developed world. As an ideal solution, Piketty has proposed progressive income taxation based on automatic exchange of bank information. The ideal analogy proposed in tackling the spirit of African poverty is a comprehensive commitment to fighting illicit capital flight based on this. Hence, contrary to theoretical underpinnings of exogenous growth models, catch-up may not be so apparent. Implications for the corresponding upward bias in endogenous development and catch-up literature are discussed.

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Institutional Governance, Education and Growth

Institutional Governance, Education and Growth

This result is very relevant to us. Indeed, the index of the quality of corporate governance given by the S parameter seems to play-out (by means of two main channels) a fundamental role on the rate of growth (directly or indirectly based on incentives). Accordingly, we respect to the first or direct channel, good corporate governance tends to encourage individuals to invest in long lengths of study which involves strong human capital accumulation and directly affects the growth rate. Moreover, as the economic growth rate depends on the rate of return on human capital, good governance institutions also impact this performance and therefore translate this impact on the growth rate of the economy. Accordingly, the second channel appears in the explicit function of the economic growth rate.

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The Whole of the Storm: Money, debt and crisis in the current Long Depression

The Whole of the Storm: Money, debt and crisis in the current Long Depression

The key point is this: if they restrain equity growth by increasing their dividends, the additional money remains part of social capital, unless they consume it in riotous living. The general profit rate will continue to decline, because the capital is now accumulating in the money sector instead of industry. But the only source of income remains the $20, which sets an absolute ceiling on the return to any further instruments the financiers choose to create. This will not be immediately transparent, because of the illusion that money begets money, and they may well create an entire mountain of overvalued derivatives. This hot air bubble, however, merely stokes the storm; it lasts only, and precisely, until the lightning strikes again. In short, neither Main Street nor Wall Street produce the underlying problem but the very fact of accumulation itself; whether this takes place in the industrial, or the financial sphere, may modify the form of the crisis takes, but cannot eliminate its cause.

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Co-evolution of Information Systems in Fast-Growing Small Firms

Co-evolution of Information Systems in Fast-Growing Small Firms

The paper examines the co-evolution of different dimensions of information systems for a sample of fast-growing small firms. The investigation uses primary source longitudinal empirical evidence. The data are taken from a large database on the life- cycle experience of one-hundred-and-fifty new business starts over a four-year period. They were collected by face to face interviews with owner-managers of small entrepreneurial firms. Interviews were conducted using an administered questionnaire that covered the agenda of markets, finance, costs, business strategy, the development of a management information system, human capital, organisation and technical change. This work uses primarily the data on management information systems. The basic approach used is to compare the attributes of the fastest and slowest paced firms, as identified by their growth rates. We then examine the evolution of these firms’ management information systems. The measures used to identify changes in systems include: capital investment techniques, such as return on investment, residual income, net present value, internal rate of return and payback period; methods for managing costs, like just-in-time management, activity-based costing, quantitative risk analysis, value analysis, strategic pricing and transfer pricing; and using computer applications for storing information, project appraisal, financial modelling, forecasting and sensitivity analysis.

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The historical transience of capital: the downward trend in the rate of profit since XIX century

The historical transience of capital: the downward trend in the rate of profit since XIX century

countries on the Marxian rate of profit but, otherwise this case, all studies that address an international comparison, due to data availability, focus on the rate of return on fixed capital. Chan-Lee and Sutch, in one of the first comparative analyses, studied the profit rates of OECD countries for the period 1960-1980, clearly reflecting the decline due to the profitability crisis in the seventies. Li et al conducted a study that considers the long-term profitability for the UK, U.S., Japan and the Euro zone (from the 60s) in the context of a historical analysis of the global hegemony of successive states in the world system. Duménil & Lévy also compared the profit rates levels for these countries, although in a more limited temporal range. Zachariah makes a similar exercise, adding too China and India. However, he does not estimate the return on reproductive fixed capital, but additionally includes dwellings, which are not part of the fixed capital and the process of capitalist production itself 9 .

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Inflow of Educational Capital, Intermediation and Informal Sector

Inflow of Educational Capital, Intermediation and Informal Sector

Commodity X is produced in a skill specific formal sector using skilled labour (S) and physical capital (K). The labours of sector X have attained some special training to secure a job here. Special training can easily encompass the issues such as vocational training, technical training, computer literacy, software knowledge etc. A software developing firm may be a good example of this type of sector.Since X is a skill intensive formal sector the labours are paid a wage at a rate 𝑊 which is obviously greater than the wage of unskilled labour. Physical capital (K) gets a return ‘r’ per unit. Per unit price of commodity X (𝑃 ) is determined in the international market and the country in assumption being a small participant in world trade is unable to influence the price. Competitive price equation for this sector is given as

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DIVIDEND POLICY AND TAXATION: A REVIEW

DIVIDEND POLICY AND TAXATION: A REVIEW

The thesis of Modigliani and Miller operated in a world without taxes, or at least neutral when the realization of the income. This hypothesis is not consistent with reality. Generally, dividends are taxed as capital gains, especially for people whose tax rate is in the highest brackets. Investors necessarily include tax considerations in their choice. Their fiscal situations are not identical; they admit that some rather propose dividend and other rather suggest more capital gains. For example, Farrar and Selwyn (1967) have proven that if the dividends are consistently more heavily taxed than capital gains, companies should avoid paying dividends. They should rather satisfy the needs for liquidity of the shareholders by using other substitutes in the dividend which have distribution of bonus shares, share repurchase…(Albouy & Dumontier, 1992). Brennan (1970) - who inserts the taxation of the products of actions into a new version of the Capital Asset Pricing Model (CAPM) - also follows the same reasoning of Farrar and Selwyn (1967). They have shown that for a given level of risk, a generous dividend distribution will result in an expected return much higher than the tax difference between dividends and bigger capital gains is. Thus, Brennan finds that the more favorable tax treatment of capital gains over dividends should normally lead to a lower evaluation.

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Is Private Leverage Excessive?

Is Private Leverage Excessive?

This paper focuses on the quantitative question of whether taking the market price exter- nality into account leads the government to choose very di¤erent capital requirements from those already required by the market. We use a business cycle model with credit constraints, which is similar to Kiyotaki (1998). In our environment borrowing and lending is motivated by a heterogeneity in the productivity of di¤erent …rms. But because debt is assumed to be uncontingent and secured against collateral, aggregate shocks can damage the net worth of borrowers and reduce their access to …nance. I assume that borrowing entrepreneurs in the model know that aggregate productivity shocks may hit and this gives them an incen- tive to hedge their net worth by borrowing less than the market determined debt limit. We nevertheless …nd that high productivity …rms choose to take the maximum permitted leverage despite the risks to net worth this involves. The intuition for this is simple. High productivity entrepreneurs earn such a good return on their productive assets that insuring their net worth by leaving themselves with spare debt capacity is too costly. Because the owners of these fast growing …rms have very good future consumption opportunities, saving at prevailing market prices is a very bad proposition for them. So they rationally choose to leverage up to the debt limit, accepting the ex post volatility in the rate of return on their portfolios.

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Macroeconomic Impact of Population Aging in Japan: A Perspective from an Overlapping Generations Model

Macroeconomic Impact of Population Aging in Japan: A Perspective from an Overlapping Generations Model

In the baseline scenario, the real return on capital is lowered as the labor input drops more quickly than the capital input because of the fertility rate decline. Meanwhile, the after-tax return on labor (the e¤ective wage) is reduced more as a result of higher con- tribution rates. Average working hours and workers’ capital saving rate are higher in the baseline scenario than in the counterfactual scenario. In the baseline scenario working-age households work more and save more because their lifetime income decreases substantially due to the lower factor prices (e¤ective wage and return on capital) caused by the fertility rate decline. As Figure 6 shows, GNP per worker is thus higher in the baseline scenario. GNP per capita, however, is lower in the baseline scenario because the increase in GNP per worker is more than cancelled out by the decline in the proportion of the working-age population. This relative decrease in the working-age population is the dominant factor depressing GNP per capita in the next few decades. It is noteworthy that these adverse e¤ects on GNP per capita will expand sharply through the forecast horizon. Population aging also a¤ects the …scal balance. Figure 7 displays the impact of a fertility rate decline on the primary balance and net government debt level. The fertility rate decline deterio- rates the primary balance because it lowers tax revenues of the general government. As a result, government debt accumulates more quickly over time.

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Thinning schedules for spruce stands

Thinning schedules for spruce stands

In the context of a comparison between rotation forestry with repeated high thinnings on the one hand and stationary continuous-cover forestry on the other, one possibly should discuss other factors, in addition to the capital return rate. Firstly, the harvest volume is much greater in rotation forestry (Fig. 7). Secondly, the low basal area and stem count in the stationary state (Figs. 5 and 6) may induce a significant risk of wind damage. An intense improvement harvesting in rotation forestry also may induce an elevated risk of wind damage [16, 17], but that risk can be reduced by implementing the improvement harvesting in stages, if necessary. Thirdly, risks involved in lengthy stationary forestry in terms of diseases and eventual loss of vigor are not fully known.

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Still More on Why We Should Bury the Marginal Productivity Theory of the Price of Capital : a Supplementary Note

Still More on Why We Should Bury the Marginal Productivity Theory of the Price of Capital : a Supplementary Note

The marginalist or neoclassical theory is seen to run into difficulties in respect both of explaining the determination of the rate of return on capital and in understanding the possibilities that exist as regards choice of technique. These difficulties result from the neoclassical presumption of a constant one-to-one relationship between the values placed on commodities produced within the economy and the quantities of real physical “stuff” (measured in appropriate terms) of which they are comprised. But, a given commodity or given collection of commodities (such as a set of capital goods) has, in the real world context of production with a surplus, no unique value, independent of the division of the surplus, relative to other goods or sets of goods. The neoclassical theory is led into error by failure to appreciate that the value of a specific stock of capital goods depends on the going rate of return on capital; it is baffled by the possible implications of the fact that the ranking of techniques of production in terms of capital or labour intensity (with technical specifications unaltered) is likewise dependent on the distributional situation.

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In terms of empirical studies, Studies on NPLs can be divided into five categories. The relevant tranche of literature to this study views NPLs at macroeconomic level across countries using the aggregate level of NPLs. Under this tranche, disaggregation of loan types across sectors within a group of countries is sometimes done in order to view NPLs irrespective of the category of determinants. The proposed study falls partially into this category. For instance, Beck, Jakubik & Piloiu (2013) investigated the macroeconomic determinants of NPLs in a group of 75 countries using 10-year data. Using panel data analysis as the estimating technique, they first selected possible factors based on theory and a priori expectation. Their results, which are robustly validated using the Random effect model framework, suggest that significant determinants of NPLs are the lending rate, the exchange rate, the real GDP growth rate and share prices. In terms of share prices, greater impact was found in countries with a larger stock market relative to GDP ratio. For the exchange rate, countries with managed or pegged exchange rate systems seem to have unhedged borrowers of foreign exchange and this determines the direction of the effect on NPLs. Makri, Tsagkanos & Bella (2014) studied the determinants of NPLs in the banking system of 14 countries in the Euro zone covering a period of nine years focusing on both bank-specific and macroeconomic variables. The study used the aggregate level of NPLs and employed the difference Generalized Method of Moments (GMM) as the estimating technique. The results suggest that there is a significant relationship between NPLs and macroeconomic variables such as unemployment, public debt, and the GDP growth rate. The study also found that bank-specific variables such as capital adequacy ratio, return on equity and NPLs of the previous year contributed significantly to the level of NPLs.

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Community development finance institutions and the ‘poverty trap’: social and fiscal impact

Community development finance institutions and the ‘poverty trap’: social and fiscal impact

In search of a way forward, we attempted to adapt to the UK context a class of ‘poverty trap’ models typically applied to less developed countries, in which the rate of return falls, and the discrepancy between actual and potential output increases, as income falls. To counter this vicious circle, policy and institution-building need over the long term to counter the natural and relational factors which define the trap, the most severe of which is risk. Policies to increase the risk efficacy, or ability to defend against risk, of low- income people therefore form a crucial and necessary element in the strategy of CDFIs, as of other anti-poverty institutions. Indeed, our empirical analysis finds that several of the traditionally key factors in expanding the incomes of the poor, such as social capital and some elements in human capital, are not in themselves statistically significant except in association with institutional defences against risk. Thus the realisation of many elements in the potential contribution of CDFIs, including the fiscal one, waits on an effective solution of this problem of institutional design.

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Formal Informal Credit Market Interlinkage and Development Policies: A General Equilibrium Analysis

Formal Informal Credit Market Interlinkage and Development Policies: A General Equilibrium Analysis

In this model, we introduce the existence of both skilled labour and unskilled labour. The present paper con- ceptualizes this distinction in terms of the sectors in which they are utilized. To be more specific, the import competing manufacturing sector is produced with the help of skilled labour whereas the informal sector and the export oriented agricultural sector use unskilled labour. The wage of skilled labour and unskilled labour are as- sumed to be perfectly flexible. Informal sector is utilized in production related activities of all the three sectors. Formal credit is utilized by the urban formal sector and the export oriented agricultural sector. Since, informal credit is perfectly mobile between sectors; we have a common rate of return on informal credit in all the sectors. The institutional rate of return on formal capital is also same in the urban formal sector and the rural sector. We assume that formal credit and informal credit are substitutable in nature. In the present model we have endoge- nised the supply of informal credit. The supply of informal credit is taken as a function of the relative differen- tial between the interest rates in the informal and formal markets. The supply of formal credit is exogenously given.

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Experiences from the United Kingdom in the regulation of privatised utilities

Experiences from the United Kingdom in the regulation of privatised utilities

In practice, price caps are based on forecast costs adjusted by reference to an efficiency target. Thus they partly relate to actual costs (implying a reversion to rate of return regulation), modified by an estimate of attainable cost savings. This was the essential basis of the recent price reviews in both water and electricity distribution. The incentives established by this regime are not particularly attractive and, in some respects, perverse. The regulator cannot, after the event, distinguish between cost savings which arise because cost forecasts were unduly pessimistic and those which arise because the firm has done better than could reasonably have been expected. The regulated firm has therefore very strong incentives to pad out its forecasts of operating costs and investment needs. Since the regulator knows less than the company about what is indeed necessary, they are inevitably forced to make arbitrary reductions in the levels of cost and capital spending planned by firms, and such reductions will, on average, be justified. But these will affect all firms, not just those which most exaggerated their expected costs; and that means that all firms must play the game of proffering inflated estimates of operating costs and investment needs, even if they would rather be frank and open with the regulator.

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Venture Capital Best Practice Strategies To Reduce Economic Uncertainty In Biofuel Investing

Venture Capital Best Practice Strategies To Reduce Economic Uncertainty In Biofuel Investing

Staging is a common practice and an vital activity to reduce uncertainty by limiting negative financial exposure in subsequent staging rounds, reducing the effects of asymmetry of information, and preventing the funding of low return on investment projects (Dahiya & Ray, 2012; Geronikolaou & Papachristou, 2011; Hsu, 2010; Smolarski & Kut, 2011). IVC firms face maximum risk in the staging process during the initial round of financing (Smolarski & Kut, 2011). By staging, the IVC firm invests capital and provides additional value-added services to the portfolio firm (Smolarski & Kut, 2011). Wiltbank, Read, Dew, and Sarasvathy (2009) and Dahiya and Ray (2012) indicated that staging mitigates moral hazard by avoiding the introduction of significant portions of funding at the beginning of a project. Hsu found the level of the risk-free interest rate is not a major determinant in the timing of funding at a particular stage. Incremental financing helps the IVC to define goals, monitor the progress of the portfolio firm, and provides the IVC with the option to abandon a project, to delay further investment in a project that is not performing to agreed to standards, or to invest in the opportunity (Driouchi, Leseure, & Bennett, 2009; Rajan, 2010; Smolarski & Kut, 2011).

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Manufactured Exports and FDI in Southern Mediterranean Countries: Evolution, determinants and prospects  MEDPRO Technical Report No  14/April 2012

Manufactured Exports and FDI in Southern Mediterranean Countries: Evolution, determinants and prospects. MEDPRO Technical Report No. 14/April 2012

We scaled down FDI by GDP to correct for the differences in countries’ sizes. The explanatory variables are in real terms. The relationship between per capita GDP and FDI is debated in the empirical literature (Asiedu, 2002). For instance, Schneider and Frey (1985) consider GDP per capita as reflecting the wealth of the resident of the host country and then demand effectiveness. The expected sign of the corresponding coefficient is, therefore, positive. In contrast, Edwards (1990) interprets GDP per capita as the inverse of the return on capital in the host country. Then the coefficient of GDP per capita in the FDI equation is expected to be negative. A higher real per-capita income is supposed to decrease the attractiveness of FDI. The growth rate of GDP reflects the dynamism of the host country and its future market size. An increase in this growth rate characterises a dynamic economy, which may be more attractive for investors. The four variables are from the World Development Indicators published by the World Bank.

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Oil Price Shocks and Housing Business Cycles in Iran: Markov Regime-Switching GARCH Model

Oil Price Shocks and Housing Business Cycles in Iran: Markov Regime-Switching GARCH Model

can be generalized to the relationship between the liquidity and housing prices (Aram et al, 2011). The results of some studies show that; the construction sector absorbs 25% of country’s liquidity (Abasinezhad & Yari, 2010). There is also a relationship between the GDP business cycle and housing business cycle in most of the world's countries (Funke, & Paetz, 2013). At the microeconomic level, the share of housing at the expenses of an urban household has reached form 6.27% in 2005 to 35% in 2016, and this rate is more severe in lower deciles. The shortage of apartments have also reached form 27 in 1979 to 4 in 2016, while the number of households have grew by 260 percent (3.6 times). Thus the household per capita rate of apartment shortage has decreased about 1.87 times in last four decades. The rental rate among the Iranian households were about 22.9, 26.6 and 30.7 percent in 2006, 2011 and 2017 and 67.9, 62.7 and 60.5 percent of the Iranians were the landlords, which shows that housing is a capital item among the households (Iran's Statistics Center, 2017). Of course, housing is a very fundamental need in determining the livelihood portfolio in estimating the poverty line (Khabazzadeh et al., 2014) and it is also a luxurious need (Iacoviello, 2004, 2010). Thus housing demand which is known as a capital good is a function of capital return rate in housing sector compare to the return rate of other different investments (Nasrollahi and Gholami, 2014). In some developed economies like Ireland, the housing sector has the most contact with money market, as giving the bank guaranties to housing sector in long and short terms is highly correlated (Grace & Mir, 2013). However, there is a one-way relationship between banking facilities and housing prices in

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