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Economic rents, the demand for capital, and financial structure

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  • Richard W. Kopcke
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    Abstract

    The correspondence between the demand for capital and various measures of the return on assets, the cost of capital, and Tobin’s q often is tenuous (Abel and Blanchard 1986; Hayashi 1982), at times even perverse. Of a variety of possible explanations, this paper considers the consequences of allowing for declining returns to capital--a declining marginal efficiency of capital schedule (MEC). This modification not only relaxes the connection between the demand for capital and many of its traditional determinants, but it also may introduce a connection among the value of the firm, its financial structure, and its stock of assets.

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    File URL: http://www.bostonfed.org/economic/wp/wp1991/wp91_8.pdf
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    Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 91-8.

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    Date of creation: 1991
    Handle: RePEc:fip:fedbwp:91-8
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    Keywords: Capital;

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    1. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    2. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    3. Modigliani, Franco, 1982. " Debt, Dividend Policy, Taxes, Inflation and Market Valuation," Journal of Finance, American Finance Association, vol. 37(2), pages 255-273, May.
    4. Ben Bernanke & Mark Gertler, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 87-114.
    5. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    6. James G. Witte & Jr., 1963. "The Microfoundations of the Social Investment Function," Journal of Political Economy, University of Chicago Press, vol. 71, pages 441-441.
    7. Poterba, James M. & Summers, Lawrence H., 1983. "Dividend taxes, corporate investment, and `Q'," Journal of Public Economics, Elsevier, vol. 22(2), pages 135-167, November.
    8. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-985, December.
    9. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, vol. 54(2), pages 249-273, March.
    10. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    11. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    12. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
    13. Greenwald, Bruce C. & Kohn, Meir & Stiglitz, Joseph E., 1990. "Financial market imperfections and productivity growth," Journal of Economic Behavior & Organization, Elsevier, vol. 13(3), pages 321-345, June.
    14. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
    15. Alan J. Auerbach, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 93(3), pages 433-446.
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