Anthony Bonen

Using a q theoretic frame to control for firm value and expected cash flows, we find scant evidence that the expected returns to equity covary inversely with the cost of debt.  Implied cost of equity capital estimates are highly correlated with the cost of debt in all specifications, and factor model-based (e.g., CAPM)  estimates exhibit the expected offsetting relationship in full sample testing but the finding is not robust.  These results are inconsistent with basic capital cost theory.  We present  preliminary evidence that share buybacks explain part of the paradoxical results.

The paper applies insights of legal and social theory to improve the economics of corporate governance. The discussion leads to a reduced-form model in which classical, or proprietary, owners derive non-pecuniary utility from the firm which outside, minority and/or short-term shareholders do not. Shareholders are effectively compensated for this through higher pay-outs that reduce investment and the value of the firm. As they are the ultimate employers in the corporation, this behavior is termed shareholder rent-seeking.

The leverage cycles of households in Canada and the United States are com- pared to the the optimal debt/net worth ratio prescribed by a stochastic optimal control (SOC) model. The SOC model employed extends Jerome Stein’s (2003) optimal leverage metric by modeling the interest rate as a stationary, mean-reverting (Ornstein-Uhlenbeck) diffusion process and speculative capitals gains as a geometric Brownian motion with a variable trend rate. The difference between the normalized observed and optimal leverage is an early warning sign (EWS) of financial fragility. We find that Canadian households are in a fragile state. Therefore, a negative shock to the Canadian real estate sector could ignite a crisis but this is unlikely to be as severe as the US housing market crash in 2008/09."

We update the NIPA adjustments pioneered by Ruggles and Ruggles (1992) for the period 1947-2012 and reconfirm their results: household net lending to other sectors is counter-cyclical and is a small fraction private firms' gross capital formation (GCF). To test the causal role of household Net Savings in terms of GCF and GDP growth, a VEC model is estimated. The VECM is cointegrated stationary for the three annual time series, but exogeneity testing shows household Net Savings is exogenous. We argue this is evidence of intersecotral investment demand as driving feature of growth.

Public expropriation of private property requires the injured parties to be appropriately compensated.  When there is an international component to such ‘takings’, arbitration panels rely on the relevant bilateral investment treaty (BIT) in order to determine the amount, or quantum, of compensation.  BIT arbitration and jurisprudence now ubiquitously rely on the Hull formulation for compensation which, in turn, has come to be interpreted as the ‘market value’ of the property taken.  Rarely, however, is this market value evident.  Takings arbitration has therefore come to rely on a ‘private buyer model’ which presupposes the validity of (sometimes controversial) economic theories to establish compensation paid by the State.  Yet, given the widespread support for State prerogatives in defining and executing domestic policy interventions (i.e., ‘embedded liberalism’), the circumscribed role of the State’s ability to manage its own property rights regime represents a concerning trend toward technocratic governance.
I argue that the recent observance that BITs' compensation clauses are loosening stems from governments' realisation that compensation at market value has little meaning in the context of government takings.  Indeed, the very idea of treating the government as just another market participant misinterprets free exchange and, more fundamentally, subtlety weakens the Grand Compromise of embedded liberalism - a compromise that no government wishes to destroy."

The excessive volatility of the stock market remains unexplained by financial economic theory. The debate between efficient market theories and behavioural finance has led to a greater recognition of the importance and persistence of such volatility.  However, neither strand of the debate has offered a rational-actor explanation of this observance.  This paper argues that such a rational explanation exists but has been omitted because both schools of thought assume that rational shareholders are motivated only by the prospect of dividends - what I call the 'entrepreneurial incentive'.  Through an analysis of the share's legal history it is clear that this contract has two distinct and severable legal-economic natures.  These translate into two distinct incentives for shareholders - one akin to ownership and one akin to lending.  Yet the former incentive alone is necessary and sufficient for the optimality of the stock market, whereas the latter incentive is simply ignored. Thusly motivated by two incentives, shareholders are prone to generate sub-optimal volatility even while acting rationally.

Proponents of central banks ability to "lean against the wind" of asset-price bubbles call for tighter monetary policies during unsustainable price booms, as observed during the 2000s.  Those against such a shift in policy (including all of the major central banks) argue that: a) central bankers are no better at identifying bubbles than investors, and; b) even with accurate identification monetary policy is too blunt to appropriately limit such bubbles.  While the second, technical point must be vetted against empirical evidence, the former, theoretical argument is based on a false assumption of what constitutes a "price bubble".

Although most economists implicitly view "bubbles" as price deviations from "fundamental value", this is a fallacy.  Such a definition (rampant though it is) relies on the belief that commodities have an intrinsic value - an objective price.  Clearly, since the theory of marginal utility replaced the Labour Theory of Value in the 1870s no liberal economic theory has supported the idea that market value exists beyond the rate of exchange (price) set by the freely exchanging parties.  This is the very basis of the free market.  Thus the entire 'lean against the wind' debate is askew insofar as discussants believe such a policy shift would require identifying 'fundamental value' better than investors.  Instead monetary authorities and economists must recognise that bubbles have meaning only in the sense of price changes that are likely to quickly reverse course.  Although 'fundamental value' is a useful fallacy for investors, theorists and policymakers must not be blinded by this unfounded rhetoric.