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Economic rents, the demand for capital, and financial structure

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  • Richard W. Kopcke

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.

Suggested Citation

  • Richard W. Kopcke, 1991. "Economic rents, the demand for capital, and financial structure," Working Papers 91-8, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbwp:91-8
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    File URL: http://www.bostonfed.org/economic/wp/wp1991/wp91_8.pdf
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    References listed on IDEAS

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    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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