The objective of this paper is to describe a valuation decision model for a firm in a multi-country environment. The paper extends the works of Myers, Myers and Pogue and Lev to include individual investment project decisions to the global marketplace. The model integrates the buy or builds decision, the location of production, distribution decision and tax effects into the capital investment decision of the firm. The model shows that a firm's production decision (buy or build), the customer location and tax effects are interdependent. The model to optimize the value of the firm is a function of the interdependencies of the input and financing factors. This will require significant modification of the traditional theories used for the determination of a firm's capital structure and cost of capital. This implies the current methodology used to learn finance needs to be modified. The paper also briefly discusses its implications on government policy for the economy and the firm.
{"title":"Financial Framework for Global Investment and Implications","authors":"Robert Rainish, P. Mensz","doi":"10.2139/ssrn.2019955","DOIUrl":"https://doi.org/10.2139/ssrn.2019955","url":null,"abstract":"The objective of this paper is to describe a valuation decision model for a firm in a multi-country environment. The paper extends the works of Myers, Myers and Pogue and Lev to include individual investment project decisions to the global marketplace. The model integrates the buy or builds decision, the location of production, distribution decision and tax effects into the capital investment decision of the firm. The model shows that a firm's production decision (buy or build), the customer location and tax effects are interdependent. The model to optimize the value of the firm is a function of the interdependencies of the input and financing factors. This will require significant modification of the traditional theories used for the determination of a firm's capital structure and cost of capital. This implies the current methodology used to learn finance needs to be modified. The paper also briefly discusses its implications on government policy for the economy and the firm.","PeriodicalId":288608,"journal":{"name":"ERN: Capital","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130728735","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I document that emerging markets have cast off their "original sin"--their external liabilities are no longer dominated by foreign-currency debt and have instead shifted sharply towards direct investment and portfolio equity. Their external assets are increasingly concentrated in foreign exchange reserves held in advanced economy government bonds. Given the enormous and rising public debt burdens of reserve currency economies, this means that the long-term risk on emerging markets' external balance sheets is shifting to the asset side. However, emerging markets continue to look for more insurance against balance of payments crises, even as self-insurance through reserve accumulation itself becomes riskier. I discuss a possible mechanism for global liquidity insurance that would meet emerging markets' demand for insurance with fewer domestic policy distortions while facilitating a quicker adjustment of global imbalances. I also argue that emerging markets have become less dependent on foreign finance and more resilient to capital flow volatility. The main risk that increasing financial openness poses for these economies is that capital flows exacerbate vulnerabilities arising from weak domestic policies and institutions.
{"title":"Role Reversal in Global Finance","authors":"E. Prasad","doi":"10.3386/W17497","DOIUrl":"https://doi.org/10.3386/W17497","url":null,"abstract":"I document that emerging markets have cast off their \"original sin\"--their external liabilities are no longer dominated by foreign-currency debt and have instead shifted sharply towards direct investment and portfolio equity. Their external assets are increasingly concentrated in foreign exchange reserves held in advanced economy government bonds. Given the enormous and rising public debt burdens of reserve currency economies, this means that the long-term risk on emerging markets' external balance sheets is shifting to the asset side. However, emerging markets continue to look for more insurance against balance of payments crises, even as self-insurance through reserve accumulation itself becomes riskier. I discuss a possible mechanism for global liquidity insurance that would meet emerging markets' demand for insurance with fewer domestic policy distortions while facilitating a quicker adjustment of global imbalances. I also argue that emerging markets have become less dependent on foreign finance and more resilient to capital flow volatility. The main risk that increasing financial openness poses for these economies is that capital flows exacerbate vulnerabilities arising from weak domestic policies and institutions.","PeriodicalId":288608,"journal":{"name":"ERN: Capital","volume":"75 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129393699","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
How does financial integration impact capital accumulation, current-account dynamics, and cross-country inequality? We investigate this question within a two-country, general-equilibrium, incomplete-markets model that focuses on the importance of idiosyncratic entrepreneurial risk--a risk that introduces, not only a precautionary motive for saving, but also a wedge between the interest rate and the marginal product of capital. Our contribution is to show that this friction provides a simple explanation for the emergence of global imbalances, a resolution to the empirical puzzle that capital often fails to flow from the rich or slow-growing countries to the poor or fast-growing ones, and a set of policy lessons regarding the intertemporal costs and benefits of capital-account liberalization.
{"title":"Financial Integration, Entrepreneurial Risk and Global Dynamics","authors":"G. Angeletos, Vasia Panousi","doi":"10.2139/ssrn.1960018","DOIUrl":"https://doi.org/10.2139/ssrn.1960018","url":null,"abstract":"How does financial integration impact capital accumulation, current-account dynamics, and cross-country inequality? We investigate this question within a two-country, general-equilibrium, incomplete-markets model that focuses on the importance of idiosyncratic entrepreneurial risk--a risk that introduces, not only a precautionary motive for saving, but also a wedge between the interest rate and the marginal product of capital. Our contribution is to show that this friction provides a simple explanation for the emergence of global imbalances, a resolution to the empirical puzzle that capital often fails to flow from the rich or slow-growing countries to the poor or fast-growing ones, and a set of policy lessons regarding the intertemporal costs and benefits of capital-account liberalization.","PeriodicalId":288608,"journal":{"name":"ERN: Capital","volume":"213 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-10-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133737000","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Heterogeneity is ubiquitous in firm-level and sectoral data. Equilibrium models, however, typically assume a representative firm, as in Andrew B. Abel and Olivier J. Blanchard (1983). The representative firm paradigm leaves no role for the distribution of capital. We model capital reallocation in a general equilibrium model with two sectors. Capital adjustment costs capture illiquidity in our model, similar to Hirofumi Uzawa's (1969) capital installation technology. We follow Fumio Hayashi (1982) in assuming that the production technology is linearly homogeneous, which allows us to focus on the sectoral distribution of capital, separately from the level of total capital. The two sectors may have different levels of productivity, and we show that the distribution of capital between the two sectors is the single state variable governing investment, growth, and valuation in the economy.We analytically characterize prices and quantities, including investment, growth, the interest rate, and the price of capital (Tobin's q) at both aggregate and sectoral levels, along with the effects of sectoral heterogeneity and reallocation in the economy. Without adjustment costs, capital is immediately reallocated to the more productive sector. With adjustment costs, the central planner optimally trades off growth against the cost of reallocating capital. Hence, reallocation to the high productivity sector is not immediate, and reallocation itself expends resources. When the more productive sector is initially small, investment exceeds output in the high productivity sector, so output from the less productive sector finances growth in the more productive sector. Nonetheless, investment and growth optimally continue in the initially larger, low productivity sector. This occurs because, while the sector is relatively less productive, its output can be reinvested in the other, more productive, sector. This is more efficient than directly uninstalling capital from the less productive sector and reinstalling it in the more productive sector because of adjustment costs. The capital stock in the less productive sector dwindles over time as its growth rate shrinks, and eventually the economy specializes in the more productive technology. As the economy moves toward specialization, the growth rate is nonmonotonic. At first, the aggregate growth rate falls, because more resources are expended on reallocation, but eventually the growth rate rises as the economy specializes in the high productivity sector. The interest rate follows this same nonmonotonic pattern, first falling and then rising along with the aggregate growth rate because the equilibrium interest rate must rise with the growth rate of aggregate consumption to clear the market.
异质性在公司层面和部门数据中普遍存在。然而，均衡模型通常假设一个具有代表性的企业，如Andrew B. Abel和Olivier J. Blanchard(1983)所述。代表性企业范式没有为资本分配留下任何作用。我们在一个有两个部门的一般均衡模型中建立了资本再配置模型。资本调整成本在我们的模型中捕获了非流动性，类似于猪泽博文(1969)的资本安装技术。我们遵循Fumio Hayashi(1982)的假设，即生产技术是线性同质的，这使我们能够将重点放在资本的部门分配上，而不是总资本水平上。这两个部门可能有不同的生产率水平，我们表明，两个部门之间的资本分配是控制经济中投资、增长和估值的单一状态变量。我们分析了价格和数量的特征，包括投资、增长、利率和资本价格(托宾q)在总体和部门层面，以及部门异质性和经济再分配的影响。在没有调整成本的情况下，资本会立即重新分配到生产率更高的部门。考虑到调整成本，中央计划者在经济增长与资本重新配置成本之间进行了最优权衡。因此，向高生产率部门的再配置不会立即发生，而再配置本身也会消耗资源。当生产率较高的部门最初规模较小时，投资超过了生产率较高部门的产出，因此生产率较低部门的产出为生产率较高部门的增长提供了资金。尽管如此，投资和增长在最初规模较大、生产率较低的部门中仍能保持最佳状态。这是因为，虽然该部门的生产率相对较低，但其产出可以再投资于另一个生产率更高的部门。这比由于调整成本而直接将资本从生产率较低的部门撤出并重新投入生产率较高的部门更有效。随着时间的推移，生产率较低的部门的资本存量随着其增长率的下降而减少，最终经济会专注于生产率更高的技术。随着经济向专业化方向发展，增长率是非单调的。起初，总增长率下降，因为更多的资源被用于再分配，但最终，随着经济专注于高生产率部门，增长率上升。利率遵循同样的非单调模式，首先下降，然后随着总增长率上升，因为均衡利率必须随着总消费的增长率上升，才能出清市场。
{"title":"Capital Reallocation and Growth","authors":"Janice C. Eberly, Neng Wang","doi":"10.1257/AER.99.2.560","DOIUrl":"https://doi.org/10.1257/AER.99.2.560","url":null,"abstract":"Heterogeneity is ubiquitous in firm-level and sectoral data. Equilibrium models, however, typically assume a representative firm, as in Andrew B. Abel and Olivier J. Blanchard (1983). The representative firm paradigm leaves no role for the distribution of capital. We model capital reallocation in a general equilibrium model with two sectors. Capital adjustment costs capture illiquidity in our model, similar to Hirofumi Uzawa's (1969) capital installation technology. We follow Fumio Hayashi (1982) in assuming that the production technology is linearly homogeneous, which allows us to focus on the sectoral distribution of capital, separately from the level of total capital. The two sectors may have different levels of productivity, and we show that the distribution of capital between the two sectors is the single state variable governing investment, growth, and valuation in the economy.We analytically characterize prices and quantities, including investment, growth, the interest rate, and the price of capital (Tobin's q) at both aggregate and sectoral levels, along with the effects of sectoral heterogeneity and reallocation in the economy. Without adjustment costs, capital is immediately reallocated to the more productive sector. With adjustment costs, the central planner optimally trades off growth against the cost of reallocating capital. Hence, reallocation to the high productivity sector is not immediate, and reallocation itself expends resources. When the more productive sector is initially small, investment exceeds output in the high productivity sector, so output from the less productive sector finances growth in the more productive sector. Nonetheless, investment and growth optimally continue in the initially larger, low productivity sector. This occurs because, while the sector is relatively less productive, its output can be reinvested in the other, more productive, sector. This is more efficient than directly uninstalling capital from the less productive sector and reinstalling it in the more productive sector because of adjustment costs. The capital stock in the less productive sector dwindles over time as its growth rate shrinks, and eventually the economy specializes in the more productive technology. As the economy moves toward specialization, the growth rate is nonmonotonic. At first, the aggregate growth rate falls, because more resources are expended on reallocation, but eventually the growth rate rises as the economy specializes in the high productivity sector. The interest rate follows this same nonmonotonic pattern, first falling and then rising along with the aggregate growth rate because the equilibrium interest rate must rise with the growth rate of aggregate consumption to clear the market.","PeriodicalId":288608,"journal":{"name":"ERN: Capital","volume":"153 ","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120883902","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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