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Conservative financial policies are often criticized as serving the interests of managers rather than the interests of stockholders. We test this argument by examining the operating performance and other characteristics of firms that for a five-year period held more than one-fourth of their assets in cash and cash equivalents. Following the five-year period, operating performance of high cash firms is comparable to or greater than the performance of firms matched by size and industry or by a measure of proclivity to hold substantial cash. In addition, proxies for managerial incentive problems, such as ownership and board characteristics, are not unusual and do not explain differences in operating performance among high cash firms. We find that high cash holdings are accompanied by greater investment, particularly R&D expenditures, and by greater growth in assets. For firms that persistently hold large cash reserves, we conclude that such policies support investment without hindering corporate performance. [ABSTRACT FROM AUTHOR]

This paper argues that current discount window policy, coupled with non-borrowed reserve targeting of the Federal Reserve, makes the quantity of high-powered money endogenous. Examination of the advisability of this procedure in a stochastic environment is conducted using a general equilibrium financial model. It is concluded that the current policy reduces the destabilizing effects of shifts between various depository financial assets, but increases the effect of other asset portfolio shifts and aggregate supply disturbances. These results are consistent with the work of Poole inasmuch as the current debate over discount policy is a repackaging of the debate over interest rate or aggregates control for monetary policy. [ABSTRACT FROM AUTHOR]

This article looks at the empirical consequences of introducing endogenous capital depreciation in the standard neoclassical model with quadratic adjustment costs. To this end, we formulate an empirical specification that accommodates capital maintenance and utilization in the Euler equations for aggregate investment. The empirical estimates with data from the Canadian Survey on Capital and Repair Expenditures show that, in contrast to the existing literature, the performance of the Euler equations is improved when we account for the impact of variable capital depreciation. [ABSTRACT FROM AUTHOR]

Not properly accounting for differences between business owners and nonbusiness owners in studies of household wealth can lead to erroneous conclusions about the significance of different saving motives. Using data from the Panel Study of Income Dynamics from the 1980s and 1990s, we show that within samples of both business owners and non-business owners, the amount of precautionary savings with respect to labor income risk is modest and accounts for less than 10% of total household wealth. Previous large estimates of the size of precautionary balances resulted from pooling these two groups together. Such pooling is inappropriate given that business owners face higher labor risk and accumulate more wealth than non-business owners for reasons unrelated to precautionary motives. [ABSTRACT FROM AUTHOR]

This study examines whether straight-line depreciation, relative to accelerated depreciation, causes non-executive managers to make non-value-maximizing capital investment decisions. To do this, I conduct experiments in which managers must decide whether to continue using an existing asset or invest in a replacement asset. By design, replacing the existing asset yields higher cash flows and managers are aware of this fact. However, if the asset is replaced, then the greater remaining book value under straight-line depreciation relative to accelerated depreciation causes earnings to be lower. Lower earnings and psychological forces may push managers of firms that use straight-line depreciation away from making the economically efficient capital investment decision. The results suggest that managers of firms that use straight-line depreciation are less likely to invest in a replacement asset than are managers of firms that use accelerated depreciation. Further, the results suggest that managers perceive that an asset depreciated using straight-line depreciation has provided less retrospective utility than an asset depreciated using accelerated depreciation. In turn, I find that depreciation method-induced differences in managers' retrospective utility perceptions influence their prospective utility perceptions, which, in turn, influence managers' asset replacement decisions. By theoretically and empirically linking firms' depreciation method choice to managers' capital investment decisions, I provide evidence that a seemingly innocuous choice made for external financial re- porting purposes can cause managers to make non-value-maximizing capital investment decisions. [ABSTRACT FROM AUTHOR]

The article focuses on the demand for international reserves in less developed countries. An attempt has is made in the paper to ascertain determinants of the demand for international reserves by the monetary authorities of the less developed countries. An important aim of the paper is to improve on specifications of the demand-for-reserve functions that exist in the literature. The model presented improves on existing ones in many respects, including concepts of actual and optimum reserves are differentiated and the relationship between them rigorously specified; determinants of the optimum level of international reserves are obtained by maximizing an intertemporal, stochastic macroeconomic model; an expected export earnings variable is estimated and used as an explanatory variable; and distributed lag adjustment is introduced. In one section a modified partial adjustment model is specified. The equation to be estimated has a second-order lag scheme. In the third section, the estimation methods and data sources are discussed.

The 1986 Tax Reform Act requires property-liability insurers to discount loss reserves at a set rate to determine tax liabilities. Conversely, statutory accounting standards do not permit discounting of loss reserves in most instances. Properly applied, discounting of loss reserves establishes a risk-adjusted present value for loss reserves that reflects the economic value of these liabilities. The discount rate should reflect the appropriate risk adjustment inherent in these liabilibies and, as such, would be expected to vary by line of insurance. This note applies the capital asset pricing model to determine the appropriate discount rate. [ABSTRACT FROM AUTHOR]