tax and spend or spend and tax empirical evidence from greece spain portugal and ireland the paper examines empirically the relationship between government revenues and expenditures in four european countries greece spain ireland and portugal in relative terms all four may be considered as the poorest members of the european union yet they present a fairly diverse picture as far as their macroeconomic performance and fiscal position is concerned the empirical findings from cointegration and causality tests that are reported here indicate that in the case of greece and ireland tax and spending decisions are taken simultaneously by the fiscal authority the tax and spend hypothesis is supported in the case of spain while absence of any causal ordering between government expenditure and tax revenues has been established for portugal

a model of trade credit in a capital constrained distribution channel abstract in a product market with uncertain demand we examine a distribution channel consisting of one manufacturer and one capital constrained retailer the retailer may fund its business by borrowing credit either from a competitive bank market or from the manufacturer provided it is also to the latter s benefit to extend trade credit under bank credit financing we show that the channel behaves as if the retailer is not constrained by capital in a wholesale price contract we find that trade credit makes both channel members better off and is the unique financing equilibrium trade credit better integrates the channel than bank credit by centralizing the financing of distribution at the manufacturer we further compare bank versus trade credit under a classical channel contract revenue sharing contract in addition we present a set of numerical experiments to show how product cost internal capital and demand variability impact on the market equilibrium under both bank and trade credits

nonrenewable resource scarcity nonrenewable resource theory often is summarized by hotelling s rule this paper reviews theoretical extensions and empirical investigations of resource extraction models observed data are often inconsistent with the hotelling rule suggesting that other characteristics of nonrenewable resource supply including exploration heterogeneous ore quality technological progress and capital investment are important determinants of the dynamic behavior of resource prices given the persistent recurrence of concern about nonrenewable resource scarcity measures of nonrenewable resource scarcity and the empirical evidence for the time trends of those measures are reviewed finally the implications of nonrenewable resource scarcity for economic growth are examined

testing intertemporal budget constraints theory and applications to u s federal budget and current account deficits this paper extends previous tests of intertemporal budget balance and present value relationships by expanding the set of allowable deficit processes and by deriving a testable condition that is sufficient to ensure intertemporal budget balance as long as the expected discount rate is strictly positive using these tests the authors find that both the postwar federal budget deficit process and the process governing accumulation of u s assets by foreigners are consistent with intertemporal budget balance copyright 1991 by ohio state university press

tax adjusted discount rates this paper develops models for discount rates that are adjusted for the interest tax shields of an infra marginal firm in a general tax equilibrium where there is cross sectional variation in corporate tax rates under the assumption that the firm optimally maintains a predetermined debt ratio a tax adjusted riskless discount rate model is given for valuing certainty equivalents and a tax and risk adjusted discount rate model is given for valuing expected cash flows for the latter case the asset equity debt and tax shield betas are derived and a weighted average cost of capital interpretation is given the tax adjusted capm apt security market lines for expected returns in stock and bond markets both have the same slope but different intercepts a formula is also provided for the present value of the interest tax shield when the firm optimally maintains a predetermined debt level the analysis here also differs from the existing literature in the following respects it allows for cross sectional variation in corporate tax rates and personal tax rates it shows that the market values of risky and riskless interest tax shields differ only to the extent that tax laws provide for nonlinear taxation of gains and losses it also shows that interest tax shields should be discounted at a tax adjusted discount rate that reflects the fact that they accrue to equity investors rather than debt investors continuous time simplifications of the formulas in this paper and the previous literature are also given

common trends the government s budget constraint and revenue smoothing abstract the requirement that the government s budget be balanced in present value terms is shown to be equivalent to the condition that government expenditures inclusive of interest tax receipts and seignorage be cointegrated the condition is in fact stronger requiring that the deficit inclusive of interest be stationary stationarity of the net of interest deficit is neither necessary nor sufficient for intertemporal budget balance however it does have implications for barro s tax smoothing hypothesis data for the period 1890 1986 are consistent with intertemporal budget balance but not with tax smoothing

the political economy of fiscal restrictions implications for europe from the united states abstract this paper analyzes fiscal restrictions in the united states as a way of shedding light on the likely effects of the excessive deficits provisions of the maastricht treaty we consider their impact on levels of deficits on the cost of borrowing and on the stabilization function of fiscal policy if u s experience is any guide maastricht s fiscal restraints are enforceable but if vigorously enforced they could significantly diminish the stabilization capacity of national budgets

bankruptcy risk and optimal capital structure this study finds shortcomings in empirical tests of the capital structure irrelevance hypothesis the alternative hypothesis is that firms choose value maximizing mixes of debt and equity on account of bankruptcy costs and the tax deductibility of interest payments based upon the cross sectional implications of the tax shelter bankruptcy cost hypothesis an alternative test of the irrelevance hypothesis is performed the test examines the relationship between failure rates and leverage ratios for 36 lines of business the results are inconsistent with the irrelevance hypothesis in their landmark paper modigliani and miller 26 demonstrate that under certain assumptions the market value of a firm is independent of its capital structure these assumptions include the absence of taxes transactions costs and bankruptcy costs recently miller 24 has argued that the introduction of corporate and personal taxes does not alter the capital structure irrelevance result in the absence of bankruptcy costs 1 the inclusion of bankruptcy costs generally considered in conjunction with the tax deductibility of interest payments has led others to conclude that capital structure will affect the value of the firm 2 in this case value maximizing firms may choose optimal capital structures consisting of both debt and equity there have been numerous attempts to discriminate empirically between the miller irrelevance mi hypothesis and the tax shelter bankruptcy cost ts bc hypothesis several are discussed in section i of this paper there it is argued that studies attempting to measure directly the effect of changes in capital structure on firm values are subject to serious complications and are unable to discriminate between the mi and ts bc hypotheses other studies focus on cross sectional implications of the mi and ts bc hypotheses the cross sectional tests are based on the assertion that bankruptcy costs may tend to induce firms with greater business risk to include less debt in their capital structures whereas the mi hypothesis does not predict such a relationship unfortunately the existence of positive bankruptcy costs is not sufficient to ensure that the ts bc hypothesis will predict the inverse relation

stochastic capacity investment and flexible vs dedicated technology choice in imperfect capital markets this paper analyzes the impact of endogenous credit terms under capital market imperfections in a capacity investment setting we model a monopolist firm that decides on its technology choice flexible versus dedicated and capacity level under demand uncertainty differing from the majority of the stochastic capacity investment literature we assume that the firm is budget constrained and can relax its budget constraint by borrowing from a creditor the creditor offers technology specific loan contracts to the firm after which the firm makes its technology choice and subsequent decisions capital market imperfections impose financing frictions on the firm our analysis contributes to the capacity investment literature by extending the theory of stochastic capacity investment and flexible versus dedicated technology choice to understand the impact of capital market imperfections and by analyzing the impact of demand uncertainty variability and correlation on the operational decisions and the performance of the firm under different capital market conditions we demonstrate that the endogenous nature of credit terms in imperfect capital markets may modify or reverse conclusions concerning capacity investment and technology choice obtained under the perfect market assumption and we explain why the theory developed in this paper suggests some rules of thumb for the strategic management of the capacity and technology choice in imperfect capital markets this paper was accepted by john birge focused issue editor

estimating product market competition methodology and application abstract in oligopolies firms behave strategically and commit to actions that elicit favorable responses from rivals firm actions consequently are a function of the nature of these strategic interactions in this paper we develop a methodology for the empirical estimation of strategic interactions in product markets we then apply our measure of strategic interactions to ceo compensation we use quarterly data on profits and sales from compustat to estimate the slope of firm s reaction function when the slope is negative and marginal profits decrease with an increase in the rival s actions the firm is classified as a strategic substitute when the slope is positive and marginal profits increase with an increase in the rival s actions the firm is classified as a strategic complement as predicted by theory we find significant evidence that strategic substitutes decrease the pay for performance incentives of their ceos on the other hand strategic complements significantly increase ceo pay for performance incentives the empirical measure developed can be used to test a wide variety of strategic models

a note on mining with investment in capital one of the principal predictions of the theory of the extractive firm is that its rate of output will decline steadily throughout time recently in this journal campbell 1980 presented an interesting analysis suggesting that this behaviour may be altered if one accounts for the fact that firms must invest in some level of fixed capital which is needed in combination with variable inputs to extract the resource in the campbell analysis the fixed capital places a constraint on the maximum rate of extraction it is shown that this constraint is binding and that extraction is therefore constant over some initial period of the mine when the firm behaves optimally this note demonstrates that the campbell result is due to a fixed proportions technology assumption in particular when a neoclassical technology is assumed one finds that the constraint imposed by the level of fixed capital is never binding and that the optimal extraction rate is strictly monotonically declining as a function of time i to demonstrate this an informal argument will suffice let k be the level of fixed capital chosen by the firm let lt be the amount of the variable factor employed in period t assume that the rate of extraction et is given by the production function2

the structure and incentive effects of corporate tax liabilities this paper describes situations in which tax liabilities assume the form of a negative position in a call option this structure motivates an examination of the investment decisions of taxed corporations in the presence of risk it is shown that the structure of the tax liability creates an incentive to underinvest in more risky projects and an incentive for conglomerate merger these effects are then evaluated in the presence of conflicts of interest between stockholders and bondholders and under alternative assumptions about the tax code and about the timing of investment and financing decisions this paper makes an observation regarding the functional form assumed by the tax liabilities of corporations with potentially redundant deductions and evaluates its consequences for investment incentives interest and other deductions against taxable income can be taken for the most part only to the extent of that income in a single period model this gives the net tax liability a familiar structure it can be viewed as a call option where the exercise price on the call is the allowable deductions the tax paying entity holds a positive position in the assets which generate the taxable income and a negative position in a call option on those assets the analogy between options and the structure of tax liabilities calls attention to some interesting incentive effects concerning risk using their model of option valuation black and scholes 5 showed that the value of an option is increasing in the variance of the asset it is written on other authors have generalized this result and studied its implications for corporate financing see jagannathan 16 jensen and meckling 17 and green 15 the importance of the risk attributes of the underlying asset in option valuation suggests that taxation may have important incentive consequences for investment decisions involving risk it has been recognized in the public economics literature for some time that asymmetries in the tax schedule can affect risk taking behavior early papers by mossin 20 and stiglitz 25 studied individual portfolio decisions over a riskless and a risky asset our analysis differs from these in a number of respects the most important of these is our use of market valuation rather than expected utility in the decision maker s objective function this is surely a more appropri

safety first bankruptcy and the pricing and investment decisions of the firm the paper analyzes the impact of imposing a constraint on the probability of bankruptcy for the pricing and investment choices of firms two models are presented in which a firm faces stochastic demand in one costs are known with certainty and in the other costs of production are probabilistic in both cases the constraint induces a reduction in optimal price if demand is elastic for less elastic demand price increases may be indicated with constant costs the constraint lowers optimal investment the results are applicable to the analysis of rating agencies behavior or to the design of bond covenants especially for public utilities

is the budget deficit too large yes specifically we find that recent spending and taxing policies of the government if continued violate the government s intertemporal budget constraint as a result government spending must be reduced and or tax revenues must be increased these conclusions are based on tests of whether government spending and revenue are cointegrated in addition to examining real spending and revenue we also normalize these variables by real gnp and population for a growing economy these normalized measures are perhaps more pertinent we also test and find support for the hypothesis that deficits have become a problem only in recent years

on the interaction of real and financial decisions of the firm under uncertainty this study analyzes the interaction between the optimal level of investment and debt financing for this purpose a model is structured in which a firm facing an uncertain price has to decide on its optimal level of investment and debt the amount of investment sets a limit on output whose optimal level is determined after price is realized the debt involved is risky there exists a possibility of bankruptcy the analysis proves that investment and its optimal financing have to be simultaneously determined and that a negative relationship exists between operating and financial leverage we also demonstrate that as the tax rate increases optimal capacity decreases and optimal leverage increases an analysis of the impact of changes in the expected price shows that under some conditions an increase in expected price would lead to an increase in optimal investment firm size and a decrease in optimal debt

how big is the debt overhang problem abstract i re examine the debt overhang problem where the flexible investment level rather than the irreversible decision whether or not to operate is used to measure the underinvestment caused by debt financing i measure a large overhang cost with long term debt or short term debt as is standard underinvestment with long term debt is more severe when investment opportunities are poor and is mitigated as opportunities improve in contrast underinvestment with short term debt remains significant even when investment opportunities are good firms lever up as opportunities improve to take advantage of tax shields so that equity claimants still face the incentive to underinvest

on the intergenerational allocation of natural resources it is known hartwick and others that under standard assumptions a society that invests in reproducible capital the competitive rents on its current extraction of exhaustible resources will enjoy a consumption stream constant in time it is shown here that this result can be interpreted as saying that an appropriately defined stock of capital including the initial endowment of resources is being maintained intact and that consumption can be interpreted as the interest on that patrimony this seems like a useful rule of thumb for policy

fiscal policy and monetary integration in europe fiscal policy economists policy makers and the media often argue that the maastricht treaty and the stability and growth pact make it difficult for governments of emu countries to stabilize their economies with appropriate fiscal policy and to provide adequate public investment our empirical analysis offers little support to this view discretionary budget deficits have actually become more counter cyclical in emu countries after the maastricht treaty as well as in the other eu and non eu industrialized countries we study and while public investment has declined recently in emu countries a similar tendency is apparent in other countries and started well before the maastricht treaty was signed jordi gali and roberto perotti

on the limitations of government borrowing a framework for empiricaltesting this paper seeks to distinguish empirically between two views on the limitations of government borrowing according to one view nothing precludes the government from running a permanent budget deficit paying interest due on the growing debt load simply by issuing new debt an alternative perspective holds that creditors would be unwilling to purchase government debt unless the government made a credible commitment to balance its budget in present value terms we show that distinguishing between these possibilities is mathematically equivalent to testing whether a continuing currency inflation might be fueled by speculation alone or is instead driven solely by economic fundamentals empirical tests which have been developed for this economic question lead us to conclude that postwar u s deficits are largely consistent with the proposition that the government budget must be balanced in present value terms this abstract was borrowed from another version of this item

residual securities and personal taxes abstract this paper suggests that a residual security should have a tax advantage in a model which includes personal taxes and admits the possibility of low income states

what do oecd countries cut first when faced with fiscal adjustments expenditure in this article we explore the relationship between components of government expenditure and government size during the period 1970 2007 for a sample of 25 developed countries to shed light on how fiscal discipline might influence public spending composition in the coming years using the pooled mean group estimation we find that fiscal adjustments protect functions that have both a social and productive character such as education and health spending in addition the most productive spending that related to transport and communications is also isolated from budgetary cuts this result shows evidence of governments reacting to the voter s increasing realization that reducing productive expenditures harms long term economic growth by striking a balance between utility and economic growthenhancing expenditure

views on peak oil and its relation to climate change policy abstract definitions of fossil fuel reserves and resources and assessed stock data are reviewed and clarified semantics explain a large stake of conflict between advocate and critical voices on peak oil from a holistic sources sinks perspective limited carrying capacity of atmospheric sinks not absolute scarcity in oil resources will impose tight constraints on oil use eventually observed peaks in oil production in nearby years will result from politically imposed limits on carbon emissions and not be caused by physical lack of oil resources peak oil belief induces passive climate policy attitudes when suggesting carbon dioxide emissions will peak naturally linked to dwindling oil supplies active policies for reducing emissions and use of fossil fuels will also encompass higher energy end use prices revenues obtained from higher levies on oil use can support financing energy efficiency and renewable energy options but when oil producers charge the higher prices they can pump new oil for many decades postponing peak oil to occur while extending carbon lock in

net national product as an indicator of sustainability net national product nnp can potentially serve several objectives among others to measure value added and to be an indicator of welfare in the aftermath of the world commission on environment and development however it also seems important to investigate whether the concept of nnp can serve as an indicator of sustainability my point of departure following hicks 1946 ch 14 is therefore to require that nnp should measure what can be consumed in the present period without reducing future consumption possibilities and in line with this to argue that the nnp should equal the maximum per capita consumption level that can be sustained if sufficiently many facilitating assumptions are made then a concept of nnp that serves as an exact indicator of sustainability can easily be constructed for instance for a closed economy with a constant population a stationary technology and with only one capital good it follows that the present does not reduce future consumption possibilities if and only if it does not decrease the stock of the single capital good hence under the assumption that the one capital good k is identical to the one consumption good x nnp defined as y x k measures the maximal sustainable consumption at time t because then x y is equivalent to k the purpose of this note is to establish that with multiple capital goods it is not in general possible to construct an exact indicator of sustainability on the

interactions of corporate financing and investment decisions a dynamic framework this article analyzes the interaction between a firm s dynamic investment operating and financing decisions in a model with operating adjustment and recapitalization costs using numerical analysis we solve the model for cases that highlight interaction effects we find that higher production flexibility due to lower costs of shutting down and reopening a production facility enhances the firm s debt capacity thereby increasing the net tax shield value of debt financing while higher financial flexibility resulting from lower recapitalization costs has a similar effect production flexibility and financial flexibility are to some extent substitutes we find that the impact of debt financing on the firm s investment and operating decisions is economically insignificant

technology debt and the exploitation of growth options abstract this paper analyzes the effect of the firm s technology on the agency costs of debt it is shown that for an important class of technologies agency costs are not a uniformly rising function of leverage for these technologies relatively high leverage can be consistent with a small tax subsidy the effect of technology on the exploitation of real options by a levered firm is examined the analysis provides a framework for a direct test of the agency cost of debt hypothesis using cost data

taxes capital structure choices and equity value we use a multitude of tax reforms across the organisation for economic co operation and development oecd countries as natural experiments to estimate the market value of the tax benefits of debt financing we report time series evidence that tax reforms are followed by large changes in the value of corporate equity however the impact of tax reforms is greatly mitigated by the presence of leverage the value of debt tax savings is greater among top taxpayers among highly profitable firms and in countries where tax laws are more strongly enforced importantly the value of debt tax savings is in line with the benchmark implied by a traditional approach

the impact of debt financing on entry and exit in a duopoly this article investigates the interaction between market entry company foreclosure and capital structure in a duopoly we find that the order in which firms foreclose is determined not only by differences in firm specific factors but also by common economic factors such as the interest rate and the market profit volatility we extend the exit model by allowing financially distressed firms to renegotiate their debt contracts through a one off debt exchange offer we find that firms with high bankruptcy costs or with prospects of profit improvement can get bigger reductions on their debt repayments investigating market entry we find that financial vulnerability of the incumbent induces earlier entry article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

global oil depletion a review of the evidence within the polarised and contentious debate over future oil supply a growing number of commentators are forecasting a near term peak and subsequent decline in production but although liquid fuels form the foundation of modern industrial economies the growing debate on peak oil has relatively little influence on energy and climate policy with this in mind the uk energy research centre ukerc has conducted an independent thorough and systematic review of the evidence with the aim of establishing the current state of knowledge identifying key uncertainties and improving consensus the study focuses upon the physical depletion of conventional oil in the period to 2030 and includes an in depth literature review analysis of industry databases and a detailed comparison of global supply forecasts this communication summarises the main findings of the ukerc study a key conclusion is that a peak of conventional oil production before 2030 appears likely and there is a significant risk of a peak before 2020

input choices and uncertain demand the theory of the firm under demand uncertainty has to date assumed that the firm s input decisions are unaffected by the stochastic nature of demand this assumption is not usually made explicitly but it is implied by the assumption that the firm s cost function presumably derived by finding the minimum cost combination of inputs for any given level of output is unaffected by the uncertainty however if firms must choose some of their inputs before the uncertainty regarding demand is resolved then different input decisions may involve different levels of risk since firms decisions regarding price and output are affected by demand uncertainty and non linear risk preferences as previous authors have shown it seems reasonable to suspect that their input decisions will also be affected but if input decisions are affected then firms cost functions are not invariant to uncertainty and the results of previous studies must be reexamined three different types of firms are considered in this paper the competitive firm the quantity setting imperfect competitor and the price setting imperfect competitor input decisions of the competitive firm and the quantity setting imperfect competitor are shown to be unaffected by demand uncertainty and hence the assumption of an unchanging cost function is appropriate in these cases for the price setting imperfect competitor however input decisions are influenced by demand uncertainty and an unchanging cost function is therefore not appropriate this case is considered in some detail and conditions under which results can differ from those previously reported in the literature are examined

the impact of the degrees of operating and financial leverage on systematic risk of common stock the capital asset pricing model postulates that the equilibrium return on any risky security is equal to the sum of the risk free rate of return and a risk premium measured by the product of the market price of risk and the security s systematic risk in the capital asset pricing model beta as an index of systematic risk is the only security specific parameter that affects the equilibrium return on a risky security

public debt in brazil sustentability and its implications abstract this paper tests sustainability of brazilian public debt in the period 1991 to 2009 and analyzes implications of requiring that the brazilian fiscal policy be primarily committed to the sustainability of the public debt the retrospective analysis utilizes a set of unit root tests and avoids some of the criticism leveled at previous studies by using data which has not previously been used for this purpose and concludes that the public debt was sustainable in the period we consider the prospective analysis is based on the dsge model proposed by jodi gali et al 2007 calibrated for brazil using the conclusions of the retrospective analysis for the fiscal parameters the scenarios produced with the help of the model show that maintaining the sustainability of the public debt is consistent with the monetary policy of inflation targeting we also conclude that it is possible to reduce interest rates to levels below those prevalent at the end of 2010 simultaneously maintaining the stability of the trajectory of the public debt

budget institutions and fiscal performance of the brazilian federal government abstract this article aims to assess the impact of federal budget institutions on the primary deficit of the brazilian federal government from 1985 to 2009 a period marked by important changes in these institutions based on the methodology established in the literature on political economy that is linked to the macroeconomic mainstream three sets of budget indices and their respective sub indices are constructed and their behaviour over the period of analysis indicate that the changes made have resulted in institutions that induce greater fiscal discipline regarding the effect of these institutions on the fiscal performance the results allow us to conclude that the institutional changes have contributed to a lower government deficit

oil reserve life and the influence of crude oil prices an analysis of texas reserves oil producing exploration and production companies generate revenue from reserves which from any given well are depleting over time the reserve life index measures how long reserves would last at the current production rate if there were no additions to reserves in this study we examine the time series behavior of the reserve life index for each of the twelve onshore oil producing districts in texas specifically we model the relationship between reserve life and the real price of oil within a nonlinear ardl framework among the results we find evidence of both long run and short run asymmetries in the response of reserve life to increases decreases in real oil prices further the magnitude of the effect is greater for positive changes in real oil prices than for negative changes in real oil prices the findings are important to operators investors and policymakers interested in sustainability

sectoral supply of minerals of varying quality in this sectoral model of mineral production investment in capacity and variation in orebody grade and volume help explain some stylized facts more than one grade of ore may be exploited simultaneously mine exhaustion but not necessarily entry occurs in declining order of grade the price may rise or fall but is likely to fall initially young industry and must eventually rise at less than the interest rate unless demand expands rapidly these trends exhibit fluctuations due to entry and exhaustion of deposits resource price cyclicality is reinforced because mines keep producing at capacity when the price is falling

estimating a fiscal reaction function the case of debt sustainability in brazil this article reviews recent trends in fiscal performance in brazil estimates fiscal reaction functions for the consolidated public sector and different levels of government and tests for the sustainability of the public debt dynamics the empirical analysis based on monthly data for the period 1995 2004 suggests that all levels of government react strongly to changes in indebtedness by adjusting their primary budget surplus targets in addition the central government appears to follow a spend and tax policy changes in revenue are affected strongly by expenditure about two thirds of changes in primary spending are offset by higher revenue over the longer term institutions are also found to matter for fiscal sustainability the responsiveness of the sub national fiscal stance to indebtedness as well as that of central government revenue to changes in primary spending appears to have become stronger after 1998 when ceilings on indebtedness were introduced

oil futures a comparison of global supply forecasts this paper compares and evaluates fourteen contemporary forecasts of global supply of conventional oil and provides some observations on their relative plausibility despite the wide range of modelling approaches used and multiplicity of assumptions made it is shown that forecasts can be usefully compared along two dimensions namely shape of future production profile and assumed or implied ultimately recoverable resource of conventional oil other differences between forecasts are either secondary or are components of these two parameters the paper shows how large differences in the assumed size of the resource make relatively little difference to the timing of a global peak in conventional oil production it also examines the impact of rates of discovery reserves growth and depletion on the forecast date of peak and shows how forecasts that delay this peak until beyond 2030 rest on assumptions that are at best optimistic and at worst implausible

the effect of taxes and depreciation on corporate investment and financial leverage this paper provides an analysis of the effect of corporate and personal taxes on the firm s optimal investment and financing decisions under uncertainty it extends the deangelo aad masulis capital structure model by endogenizing the firm s investment decision the authors results indicate that when investment is allowed to adjust optimally the existing predictions about the relationship between investment related and debt related tax shields must be modified in particular the authors show that increases in investment related tax shields due to changes in the corporate tax code are not necessarily associated with reductions in leverage at the individual firm level in cross sectional analysis firms with higher investment related tax shields normalized by expected earnings need not have lower debt related tax shields normalized by expected earnings unless all firms utilize the same production technology differences in production technologies across firms may thus explain why the empirical results of recent cross sectional studies have not conformed to the predictions of deangelo and masulis

taxes and capital structure evidence from firms response to the tax reform act of 1986 while the theoretical relation between taxes and capital structure has been extensively analyzed the empirical evidence on this issue has thus far been inconclusive one of the main difficulties confronting previous empirical studies of the cross sectional relationship between taxes and leverage was the control of intervening variables the tax reform act of 1986 tra which drastically changed the tax regime provides a unique opportunity to assess the interaction between taxes and leverage decisions in a controlled environment the authors test the relationship between leverage and certain tax related variables for a large sample of companies in the years surrounding the enactment of tra the results support the tax based theories of capital structure the findings indicate that there exists a substitution effect between debt and nondebt tax shields and that both corporate and personal tax rates affect leverage decisions coauthors are dan givoly aharon r ofer and oded sarig article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the effect of leverage on bidding behavior theory and evidence from the fcc auctions this is an exploration of how bidding behavior of firms in various auctions is affected by their capital structure the theoretical model considers a first price sealed bid and an english auction we find that as debt levels increase firms tend to reduce their bids the lower bids give the competition incentives to reduce their bids as well these results are investigated empirically using data from the 1994 1995 fcc spectrum auctions consistent with the theoretical model higher debt levels of the bidding firm and of the competition tend to lead to lower bids additional determinants of bidding behavior in these auctions are also analyzed copyright 2002 oxford university press

capital intensity and the firm s cost of capital recent reports of negative capital intensity coefficients in struct ure performance equations support allegations of gross measurement error in accounting based measures of economic profitability this paper explores whether specification errors rather than measurement errors alone may explain this anomalous empirical result within a simultaneous equations model of capital intensity cost of capital and price cost margins the author employs hausman specification tests to demonstrate a negative bias on capital intensity and a positive bias on concentration when one omits firm specific cost of capital from price cost margin equations the roles of cost of capital and capital intensity are derived from formal structure performance theory copyright 1988 by mit press

fiscal sustainability and monetary versus fiscal dominance evidence from brazil 1991 2000 under a monetary dominant md regime the primary surplus adjusts to limit debt growth permitting monetary policy to be conducted independently of fiscal financing requirements in brazil some evidence favours an md regime for 1995 1997 but not for the decade of the 1990s as a whole while fiscal adjustments of 1999 yielded a primary surplus of about 3 of gdp consistent with solvency a credible md regime would require further adjustments of the primary surplus if debt increases growth falls or interest rates rise

public debt sustainability and endogenous seigniorage in brazil time series evidence from 1947 1992 abstract in this paper we investigate three central issues in public finance first was the path of public debt sustainable during 1947 1992 second how has the government balanced the budget after shocks to either revenues or expenditures were observed third are expenditures exogenous the results show that i debt is sustainable in econometric tests with the budget being balanced almost entirely through changes in taxes regardless of the cause of the initial imbalance expenditures are weakly exogenous ii the behavior of a rational brazilian consumer may be consistent with ricardian equivalence iii seigniorage revenues are critical in restoring intertemporal budget equilibrium

alternatives to conventional crude oil when how quickly and market driven abstract we examine the effect of uncertainty concerning remaining supplies of conventional crude oil and its production path on the date alternative fuels will be needed the quantity of alternative fuels needed and how this uncertainty affects firms willingness to provide alternatives in a timely fashion despite large uncertainties about the quantity of oil that remains and its production path the start date for replacements is likely to fall within a twenty two year period that is narrower and earlier than previous estimates the twenty two year window represents considerable uncertainty about the date of the peak and this uncertainty creates an asymmetry in the strategy that maximizes the welfare of firms relative to total social welfare which works against the market s ability to generate a smooth transition from oil to alternative fuels the timeliness of this transition is critical the production paths generated here suggest that 10 million barrels per day or more of alternative fuels will be needed within a decade of the peak in production of conventional crude oil

option value under income and price uncertainty abstract we present a rigorous examination of the sign of option value under income and price uncertainty we state and prove three theorems on the sign of option value when preferences are state independent if income is uncertain the sign of option value is opposite the sign of the income elasticity of the good in question the analysis of price uncertainty is in two parts one covers the case of own price uncertainty and the other the case where the price of some other good is uncertain in both cases the sign of option value is generally ambiguous

interactions of the firm s real and financial decisions this paper provides an integrated approach to the theory of the firm under technological uncertainty corporate taxes risky debt and risk neutrality it is shown that the firm s investment production and financing decisions are made simultaneously it is demonstrated that the relationship between optimal capital or labour and debt is not strictly negative as in dotan and ravid 1982 nor strictly positive as in hite 1977 the direction of this relationship depends on the characteristics of debt and the characteristics of the firm s production function given the simultaneity of the real and financial decisions it is shown that an interior optimum exists for the firm s value as a function of debt

a test of the hotelling valuation principle time series tests of the hotelling r percent rule for natural resource prices have not been strongly supportive but the tests and the data are subject to serious difficulties we propose here an alternative testing strategy based on another but less widely known implication of the hotelling model we test this implication which we call the hotelling valuation principle by regressing the market values of the reserves of a sample of u s domestic oiland gas producing companies on their estimated hotelling values we find that the estimated hotelling values account for a significant portion of the observed variations in market values and that the hotelling measures are better indicators of the market values of petroleum properties than two widely cited publicly available alternative appraisals

information and exhaustible resources a bayesian analysis abstract we develop a continuous time bayesian model of investment in information about an exhaustible resource because of the way that information affects expectations the deterministic hotelling rule turns out to be more appropriate as a description of how resource owners forecast the value of their stocks than as a predictor of observed changes in the resource price a flow of information generates both unanticipated changes in expectations which cause the mean rate of change in the resource price to deviate systematically from the deterministic hotelling rule and reductions in uncertainty which do not affect the hotelling prediction

interactions of corporate financing and investment decisions the effects of agency conflicts abstract we examine interactions between flexible financing and investment decisions in a model with stockholder bondholder conflicts over investment policy we find that financial flexibility encourages the choice of short term debt thereby dramatically reducing the agency costs of under and overinvestment however the reduction in agency costs may not encourage the firm to increase leverage since the firm s initial debt level choice depends on the type of growth options in its investment opportunity set the model has a number of testable predictions for the joint choice of leverage and maturity and how these choices interact with a firm s growth opportunities

intergenerational resource rights efficiency and social optimality the discipline of economics is generally defined as the science of the allocation of scarce resources between competing social objectives given an initial distribution of resources between economic agents how would they behave so as to improve their welfare according to the pareto criterion the agents would exchange commodities until the opportunities for fruitful exchange were fully exhausted and no agent could be made better off without rendering at least one other agent worse off pareto efficiency is a powerful concept in microeconomic analysis provided that the initial distribution of property rights is equitable allocative efficiency gives rise to the best of all possible worlds acknowledging that the assumptions of perfect competition are often violated firms are monopolistic information is incomplete and externalities exist economists have argued for the modification of institutions so that economic reality will conform more closely to the assumptions of the model that yields such gratifying results but microeconomic theory has always maintained that allocative efficiency is in itself insufficient to maximize social welfare bator 1957 a social welfare function is required to discriminate a social optimum among the array of efficient allocations that correspond to alternative assignments of property rights though economists have posited alternative functional forms for the sake of pursuing conceptual arguments welfare functions have remained elusive constructs for well known theoretical and practical reasons consequently a sharp line of demarcation has been drawn between questions of efficiency the province of economics and equity the principal focus of ethical and political discourse in resource economics however the line demarcating efficiency and equity is often crossed the term optimal depletion appears regularly where only efficient depletion is meant while political debates about resource exploitation over time are laden with questions of the proper distribution of our natural patrimony between generations resource economists have predominantly espoused particular use rules that guarantee efficiency but overlook potential improvements in social welfare achievable through the reassignment of property rights across generations we document the evolution and current status of the misuse of the term optimal depletion in section ii we develop a simple two generation three period general equilibrium model in section iii to illustrate how alternative distributions of resource rights between generations relate to alternative pareto efficient solutions in section iv we demonstrate how different social welfare functions affect the optimal solution and associated assignment of resource rights between generations

investment and financing decisions with learning curve technology abstract the learning curve has a significant impact on production cost hence corporate profit in a number of industries while the learning curve is well recognized in the economics literature and its effect on operating costs and production decisions widely studied its effect on corporate investment has been largely unexplored to our knowledge there is one paper that examines this issue but it is limited to unlevered firms we therefore examine a levered firm s optimal investment and financing choices when using learning curve technology the main findings are as follows the effect of leverage on the investment decision depends on the level of debt using the optimal debt level will result in earlier and larger investment thus leverage has a positive effect on investment overall and the difference between levered and unlevered firm is an increasing function of learning speed the optimal leverage ratio without a borrowing constraint is an increasing function of learning speed with a borrowing constraint the investment decision is similar to the unconstrained borrowing case but the leverage ratio is initially increasing and subsequently decreasing in learning speed moreover it is a decreasing function over a wider range for a more stringent borrowing constraint for decreasing returns to scale technology and for a less volatile product market

much ado about hotelling beware the ides of hubbert abstract much economic literature analyzes the hotelling principal little economic literature analyzes the hubbert curve although much controversy surrounds it this difference in emphasis by economists needs to be reconsidered critically and towards that end we attempt to look at both concepts simultaneously we test whether a simple hubbert curve model is a significant determinant of world oil price changes and whether one of the main determinants of the hotelling principle the discount rate also affects world oil prices an autoregressive distributed lag ardl bound testing approach is used to examine the effects of a hubbert index variable and a hotelling discount rate variable on the world wide price of oil results show the discount rate the most important hotelling variable has little effect on oil prices but that the hubbert curve model does show a large effect on oil prices oil is a non renewable natural resource par excellence yet the results suggest that the hotelling principle is not an important determinant for oil prices yet the hubbert curve and the theory surrounding the hubbert curve is an important determinant of oil prices