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"CAPITAL INVESTMENT"
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Efficiently inefficient : how smart money invests and market prices are determined
Efficiently Inefficient describes the key trading strategies used by hedge funds and demystifies the secret world of active investing. Leading financial economist Lasse Heje Pedersen combines the latest research with real-world examples and interviews with top hedge fund managers to show how certain trading strategies make money--and why they sometimes don't.
Book
Policy Uncertainty and Corporate Investment
Using a news-based index of policy uncertainty, we document a strong negative relationship between firm-level capital investment and the aggregate level of uncertainty associated with future policy and regulatory outcomes. More importantly, we find evidence that the relation between policy uncertainty and capital investment is not uniform in the cross-section, being significantly stronger for firms with a higher degree of investment irreversibility and for firms that are more dependent on government spending. Our results lend empirical support to the notion that policy uncertainty can depress corporate investment by inducing precautionary delays due to investment irreversibility.
Journal Article
Growing Like China
We construct a growth model consistent with China's economic transition: high output growth, sustained returns on capital, reallocation within the manufacturing sector, and a large trade surplus. Entrepreneurial firms use more productive technologies, but due to financial imperfections they must finance investments through internal savings. State-owned firms have low productivity but survive because of better access to credit markets. High-productivity firms outgrow low-productivity firms if entrepreneurs have sufficiently high savings. The downsizing of financially integrated firms forces domestic savings to be invested abroad, generating a foreign surplus. A calibrated version of the theory accounts quantitatively for China's economic transition.
Journal Article
Returns to Capital in Microenterprises: Evidence from a Field Experiment
We use randomized grants to generate shocks to capital stock for a set of Sri Lankan microenterprises. We find the average real return to capital in these enterprises is 4.6%-5.3% per year), substantially higher than market interest rates. We then examine the heterogeneity of treatment effects. Returns are found to vary with entrepreneurial ability and with household wealth, but not to vary with measures of risk aversion or uncertainty. Treatment impacts are also significantly larger for enterprises owned by males; indeed, we find no positive return in enterprises owned by females.
Journal Article
The Real Effects of Financial Shocks: Evidence from Exogenous Changes in Analyst Coverage
We study the causal effects of analyst coverage on corporate investment and financing policies. We hypothesize that a decrease in analyst coverage increases information asymmetry and thus increases the cost of capital; as a result, firms decrease their investment and financing. We use broker closures and broker mergers to identify changes in analyst coverage that are exogenous to corporate policies. Using a difference-in-differences approach, we find that firms that lose an analyst decrease their investment and financing by 1.9% and 2.0% of total assets, respectively, compared to similar firms that do not lose an analyst.
Journal Article
Investmentless Growth
We analyze private fixed investment in the United States during the past 30 years. We show that investment is weak relative to measures of profitability and valuation—particularly Tobin’sQ—and that this weakness starts in the early 2000s. There are two broad categories of explanations: theories that predict low investmentalong witha lowQ, and theories that predict low investmentdespitea highQ. We argue that the data do not support the first category, so we focus on the second one. We use industry-level and firm-level data to test whether underinvestment relative toQis driven by (i) financial frictions; (ii) changes in the nature or localization of investment, due to the rise of intangibles, globalization, and the like; (iii) decreased competition, due to technology, regulation, or common ownership; or (iv) tightened corporate governance or increased short-termism. We do not find support for theories based on financial frictions. We find some support for globalization and regulation; and we find strong support for the intangibles, competition, and short-termism or corporate governance hypotheses. We estimate that the rise of intangibles explains about one-third of the drop in investment, while concentration and corporate governance explain the rest. Industries with more concentration and more common ownership invest less, even after controlling for current market conditions and intangibles. Within each industry-year, the investment gap is driven by firms owned by quasi-indexers and located in industries with more concentration and common ownership. These firms return a disproportionate amount of free cash flows to shareholders. Finally, we show that slow-moving changes in competition are difficult to detect in macroeconomic series; standard growth-accounting decompositions confound market power and other medium-run trends, such as falling total factor productivity and labor participation.
Journal Article
Foreign direct investment and economic growth in the short run and long run: Empirical evidence from developing countries
A contribution of foreign direct investment to economic growth is possibly one of the widely examined topics in academic research in the last five decades. However, few studies have examined both the short run and long run impacts of this effect concurrently for developing and emerging markets, in particular during the period of economic turmoil that includes the global financial crisis. As such, this paper examines and provides additional and relevant quantitative evidence on the impact of foreign direct investment (FDI) on economic growth, both in the short run and the long run in developing countries of the lower-middle-income group in 2000-2014. Various econometric methods are employed such as the panel-based unit root test, Johansen cointegration test, Vector Error Correction Model (VECM), and Fully Modified OLS (FMOLS) to ensure the robustness of the findings. The results of this study show that FDI helps stimulate economic growth in the long run, although it has a negative impact in the short run for the countries in this study. Other macroeconomic factors also play an important role in explaining economic growth in these countries. Money supply has a positive effect on growth in the short run while total credit for private sector has a negative effect. In addition, long-run economic growth is driven by money supply, human capital, total domestic investment, and domestic credit for the private sector. Based on these results, recommendations for the governments of these countries have been developed.
Journal Article
The role of intangible assets in explaining the investment–profit puzzle
Starting around the early 2000s, and especially after the 2008 crisis, the rate of capital accumulation for US nonfinancial corporations has slowed down despite relatively high profitability; indicating a weakening of the link between profitability and investment. While the literature mostly focuses on financialisation and globalisation as the reasons behind this slowdown, I suggest adding another layer to these explanations and argue that, in conjunction with financialisation and globalisation, we need to pay attention to the increased use of intangible assets by nonfinancial corporations in the last two decades. Intangibles such as brand names, trademarks, patents and copyrights play a role in the widening of the profit–investment gap as the use of these assets enables firms to increase market power and profitability without necessarily generating a corresponding increase in fixed capital investment. After discussing the ways nonfinancial corporations use intangible assets, I look at large corporations in the USA and find the following: (i) The ratio of intangible assets to the capital stock increased in general. This increase is highest for firms in high-technology, healthcare, nondurables and telecommunications. (ii) Industries with higher intangible asset ratios have lower investment to profit ratios. (iii) Industries with higher intangible asset ratios have higher markups and profitability. (iv) The composition of the nonfinancial corporate sector has changed and the weight of high-technology and healthcare firms has increased; but this increase did not correspond to an equal increase in their investment share. The decline in the investment share of durables, nondurables and machinery is matched by an increase in the investment share of location-specific industries with low intangible asset use, most notably firms in energy extraction. In general, these firms have steadier markups and higher investment to profit ratios. (v) Yet, intangible-intensive industries’ profitability has increased faster than their share of investment or total assets. All in all, these findings are in line with the suggestion that the increased use of intangible assets enables firms to have high profitability without a corresponding increase in investment.
Journal Article
Minimum Wage and Corporate Investment: Evidence from Manufacturing Firms in China
This article studies how minimum-wage policies affect capital investment using the industrial census of manufacturing firms in China, where minimum-wage policies vary across counties. Exploiting discontinuities in minimum-wage policy at county borders, we find that minimum wages increase capital investment. The investment response to minimum wages is stronger for firms that are labor intensive, that have more room for technological improvement, and that cannot sufficiently pass on labor costs to consumers. A natural experiment based on county jurisdictional changes further assures the causal relationship.
Journal Article