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Asset Markets and the Cost of Capital

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James Tobin
James Tobin
James Tobin
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William C. Brainard at Yale University
William C. Brainard
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Cowles Foundation Paper 440
Reprinted from Private Values and Public Policy,
Essays in Honor of William Fellner, North-Holland, 1977
... Tobin's Q is a metric derived from market valuation, computed by dividing a company's market value by its replacement cost (Tobin and Brainard, 1976). ...
The Influence of ESG on Firm Performance: Evidence from Listed Companies in China
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  • May 2024
The primary objective of this dissertation is to examine the influence of environmental, social, and governance (ESG) factors on the financial performance of a selected group of Chinese companies listed on the stock exchange. The results indicate a negative relationship between a firm's ESG performance and overall performance, suggesting that higher ESG performance is associated with worse firm performance. Furthermore, a considerable negative association exists between company performance and the environmental, social, and governance pillars. Upon further examination, the underlying cause for this outcome could be attributed to the company's allocation of resources towards environmental, social, and governance (ESG) initiatives. This investment incurs additional costs, but it is difficult for this expenditure to pay off in the short term. This situation contributes to a decline in the corporation's overall performance. Hence, corporations must prioritize long-term profitability and redirect their focus from immediate financial benefits to enduring social responsibility and sustainability commitments. Companies can incorporate environmental, social, and governance (ESG) plans into their fundamental business strategy to guarantee that ESG objectives align with their long-term goals. This practice aids in the prevention of supplementary expenses.
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... Company value is determined by various factors, both internal and external (Tobin and Brainard 1976). With various approaches to measuring company value, the determinants of valuation are also varied, including the business environment (macro) and company-specific (micro) (Leong et al. 2022). ...
Analysis of Valuation Determinants of Commercial Banks with Digital Services in Indonesia
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  • May 2024
Purpose: The purpose of the research is to analyze the differences in bank price-to-book value based on the level of digitalization and to explore the influence of digitalization and financial factors on the price-to-book value of banks with digital services. Theoretical Framework: The theoretical framework likely encompasses theories related to digital transformation, financial performance metrics (such as price-to-book value, fee income, return on equity), and possibly theories related to banking and digital services adoption. Method: The research methodology involves statistical tests and Panel Data Regressions. Data from 24 banks covering the period from 2019 to 2022 are utilized. Result and Conclusion: The analysis reveals that higher levels of digitalization are associated with improved contributions of fee income, return on equity, and price to the bank's book value. Additionally, the level of digitalization strengthens return on equity, improves non-performing loans (NPL), and enhances capital utilization, all of which significantly influence price-to-book value. Originality/Value: The novelty of this study lies in its focus on using the price-to-book value (PBV) of commercial banks with digital services as a metric linked to digital transformation, which is distinct from previous research primarily focused on digital banks' profitability. This shift in focus allows for a deeper understanding of the impact of digitalization on bank value.
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... By dividing the current market valuation, or the price that people are currently willing to pay for assets by the replacement cost, or the cost to replace an essential asset priced at an equal value, the idea behind this ratio is that it can help us understand how financial markets and markets for goods and services are connected. By comparing the current market value to the cost of producing new goods or services, we can get a sense of whether financial markets are accurately reflecting the real value of goods and services in the economy (Tobin, 1977). ...
Economic Competitiveness: Measurements, International Reports & Abu Dhabi's Standing
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A short report for government entities to introduce the theory behind economic competitiveness and look into Abu Dhabi and UAE's standing and performance in international rankings and indices to formulate suggested improvements for the Emirate.
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... The basis of this negative relationship between the two variables was not clearly spelled out by the original marginalist authors and the plethora of approaches to the theory of investment, in the post-War era, can be seen-partly at least-to be the result of this original vagueness. Among the competing theories of investment, we can cite the "two stage approach" of Lerner (1944) and Haavelmo (1960), where the inverse relationship between the volume of investment and the rate of interest is due to the short-run rising supply price of capital goods; its microeconomic reinterpretation, the "adjustment costs approach" of Eisner and Strotz (1963), Gould (1968) and others, which-in contrast to Lerner and Haavelmo's analysis-still continues to be popular; the so-called "dynamic" "neoclassical theory of investment" of Jorgenson (1963Jorgenson ( , 1967 and Precious (1987), which also has lost its appeal even among the neoclassical economists; the 'q' theory of Tobin (1969Tobin ( , 1982 and Tobin and Brainard (1977), based on Keynes' theory of investment and, hence, popular among the Keynesians; and, despite its criticisms by By the 1930s, economists like Friedrich Hayek, Erik Lindahl and John Hicks began to see the problem more clearly, realising that conceiving capital as a given value magnitude, capable of changing its form en route to a long-run equilibrium, involved serious difficulties. 3 Conceiving capital as a given vector of heterogeneous goods � a la Walras, rather than a value magnitude, implied, on the other hand, a return to the problem that Walras himself had realised by the fourth edition of the El� ements: a long-run analysis, where a uniform rate of return on the supply price of the respective capital goods employed in the economy, is inconsistent with the data of the system assumed to be known prior to the analysis (i.e., the endowments, consumer preferences and technology), if the endowments include, as in Walras, a given quantity of each capital good (Garegnani 1990, 20). ...
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... In fact, the low interest rates and even quantitative easing proved largely irrelevantas argued more generally by Stiglitz and Greenwald (2003). What mattered was access to finance in the presence of extensive credit rationing (Stiglitz and Weiss 1981) and the broader impacts of monetary policy on the prices of the range of assets, including equity, as Tobin (1969) and Tobin and Brainard (1977) argued. ...
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Revisiting the interest rate- investment nexus in India: fresh perspective from non-parametric analysis
Article
  • Jun 2024
  • J Econ Stud
Purpose-It is generally believed that business spending on capital expenditure tends to decrease as interest rates rise, and vice versa, this is not always the case. The previous literature produces inconclusive results visa -vis the interest rate and investment nexus. This study analyzes the responsiveness of investment to changes in high and low levels of interest rates in India through a quantile-based, non-parametric method utilizing annual data from 1980 to 2022. Design/methodology/approach-This study uses Quantile-on-quantile (QQ) technique proposed by Sim and Zhou (2015) to examine the impact of interest rate quantiles on quantiles of investment. In addition, long-term association and the direction of causality are estimated through the Cho et al. (2015) test of quantile cointegration and the Jeong et al. (2012) Granger causality in quantile (GCQ) test, respectively. Findings-The empirical evidence validates that the linkage between investments and interest rate is not consistently negative and varies from quantile to quantile. The study finds a negative impact at median quantiles and a positive impact at extreme higher quantiles. Conversely, the impact at lower quantiles is negligible, which is also observed from quantile cointegration, indicating the presence of a statistically significant association above the median quantiles. Additionally, the study finds one interesting finding that there exists unidirectional causality from investment to interest rates in India rather than other way around. Research limitations/implications-The study provides significant implications for policymakers as it suggests that during extreme economic conditions, the effectiveness of traditional monetary policy tools to boost capital formation is restricted. Policymakers may consider alternative measures to stimulate investment during these time periods. The study additionally posits that the neoclassical theory of investment may not be readily applicable in emerging economies in its unaltered state, mostly due to the lack of well-developed financial markets. Originality/value-There is a limited literature available on non-linear linkage between interest rates and investment. The present study adds to the existing knowledge by investigating how investment responds differently to fluctuations in interest rates, while incorporating the complete distribution of both the variables.
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Revisiting investment and its determinants through threshold analysis
Article
  • Mar 2024
  • ACTA OECON
Since the time of classical economists, investment decisions hold centre stage in economic theory. In this article, we integrate classical economists' perspectives on the determinants of investment with the Keynesian theory of effective demand. For this purpose, we employ variables to capture the effects of profitability, the state of demand, and the financial and risk conditions using time series data from 17 major OECD economies spanning the 1960–2017 period. Two are the salient features of our article: The first is the use as profitability variables, the marginal efficiency of capital or the incremental rate of return, and the second is the use of regime changes and respective threshold values for these two key variables. The econometric results show that the profitability variables are decisive in shaping investment decisions and designating phase changes.
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Insights for Economic Security: Recovery Strategies from Cyber-Attacks
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  • Feb 2024
This article delves into strategies for businesses to bolster cybersecurity and mitigate financial losses post-cyber-attacks. It leverages Lean Six Sigma methodologies and data from past research on significant data breaches in US and EU stock markets. The study investigates the link between cyber-attacks and stock market dynamics, with a focus on reputation management. Gaussian distribution and Six Sigma methodology are used for probability analysis. Key findings underscore the significance of predictability, precision, and reputation management in cyber-risk mitigation. Effective reputation management reduces insurance costs and market share loss, while inadequate management results in higher expenses. The research introduces novel insights into safeguarding a company's value, reducing vulnerabilities, and advocating for Cyber Autonomy and reputation management to lower insurance premiums and enhance protective measures.
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