Anandi P. Sahu

CURRENT CAPITAL INVESTMENT PRACTICES

ABSTRACT This paper presents the results of a mail survey of the capital investment practices of the U.S.-based companies in the Standard & Poors Industrial Index. Unlike earlier studies, which focus on the use of project evaluation and risk analysis tools, this study considers the entire investment decision-making process, from strategic analysis through post-auditing operating performance. Analysis of the responses suggests that most responding companies use a fairly sophisticated capital investment process. They make strategic analysis a cornerstone of their capital investment process, develop quantitative minimum required rate of return and maximum acceptable risk goals, forecast investment returns on a cash basis, use discounted cash flow evaluation measures, control the implementation process, and conduct post-audits of operating performance regularly. The respondents appear less sophisticated in their treatment of risk. Only half use quantitative risk analysis and risk-adjustment techniques.

THE ASSOCIATION BETWEEN THE USE OF SOPHISTICATED CAPITAL BUDGETING PRACTICES AND CORPORATE PERFORMANCE

Abstract Since the early 1950s, the academic community has tried lo convince corporate managers that there are sophisticated techniques that can improve the capital budgeting decision-making process. Over the years, many studies have documented a trend toward increasing business use of such sophisticated capital budgeting techniques. However, there is no clear evidence whether better performing companies are more likely to employ sophisticated capital budgeting processes than are lower performing companies. This study is an attempt to measure the relationship between capital budgeting sophistication and business performance. It advances upon earlier studies by utilizing a more comprehensive capital budgeting sophistication metric, incorporating industry-adjusted independent variables (firm size, risk, capital intensity, and degree of focus), and by focusing on United States corporations. The results are similar with those of earlier studies; there is no discernible relationship between capital budgeting sophistication and corporate performance.

The Fisher Equation Controversy: A Reconciliation of Contradictory Results

This paper re-examines the alternative theoretical predictions in the Fischer equation literature. Theoretical predictions about the response of nominal interest rates to inflation expectations ranges from a partial to complete and more-than-complete adjustment of the nominal interest rate to anticipated inflation. Using a neoclassical monetary growth model, this study demonstrates how Mundell-Tobin, Fischer, Darby-Feldstein, Neilsen-Gandolfi, and Summers effects hold as special cases under specific assumptions about the parameter values of the model; thus suggesting that the magnitude of the response of the nominal interest rate to expected inflation depends on the empirical values of the critical parameters involved.

Empirical evidence of a positive inflation premium being incorporated into stock prices

This study demonstrates that in contrast to prior research findings on short-term stock returns, long-term stock returns are positively correlated with inflation. In addition, within the context of a more complete explanatory model, long-term stock returns are found to be negatively related to changes in long-term interest rates and negatively related to beginning price to earnings ratios. The significance of these variables in explaining almost all the time series variation in long-term stock returns demonstrates that changes in stock values are well explained by theory.

Tax Policy and Human Capital Accumulation in a Resource Constrained Growing Dual Economy

This paper examines the role tax policy can play in fostering human capital accumulation in a resource constrained dual economy whose population is growing. The study shows how human capital accumulation, in turn affects the intersectoral terms of trade and the economic growth process of such an economy. The dual economy is assumed to consist of two sectors, agriculture and manufacturing. Production in agriculture requires unskilled labor, land and capital whereas production in the manufacturing sector requires skilled and unskilled labor and capital. Schooling facilities are limited and access is rationed by the government. Moreover, schooling requires an investment of time. The paper demonstrates the existence of unique short run equilibrium. It also demonstrated that the steady state equilibrium is unique and locally stable. Comparative steady state analysis suggests that a balanced budget increase in public investment in education (financed by a tax increase on capital income and/or incomes of skilled workers), alters the terms trade between agriculture and manufacturing sectors and favorably affects the economic growth process.