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Selecting the best from among competing investment proposals is the most important financial decision problem faced by the managers of enterprises. It confronts every high-ranking decision-maker regardless of the nature of his organization's activity. Corporate executive, public official and university administrator alike must determine, with limited information, how much to invest in a variety of risky projects. Managers have been making these decisions since an overfed Australopithicus Robinson Crusoe decided to save a bone for a weapon rather than crack it for its marrow, but there still exists no fully-accepted objective procedure for optimal investment choice, even on a theoretical level where all problems of measurement are neglected. We believe, however, that the direction of research is dear and that a rapid rate of convergence toward an accepted capital budgeting procedure will soon become apparent. Our paper is intended as a single step (in the right direction). We have not solved the problem completely but we hope to have (a) clarified the remaining unsolved theoretical issues and (b) pointed the way toward practical interim techniques which approximate the exact procedures that will be found someday. [ABSTRACT FROM AUTHOR]

This paper presents the results of an attempt to estimate the rate of return on capital by regression analysis of financial data. A model relating current profits to current and lagged inflows of long-term capital is considered and fitted to a set of data from the British Mechanical Engineering Industry. Both time-series and cross-section data are used. Acquisitions of long-term capital are measured by summing depreciation provisions, retained earnings and receipts from issues of ordinary shares and instruments of long-term debt. [ABSTRACT FROM AUTHOR]

In this paper we present the capital structure theorem within the framework of the theory of investors' behavior towards return and risk. Such an approach constitutes a first step towards integrating the theory of the firm's finance with the theory of investors' behavior. It may also help to clarify the controversy over the capital structure theorem. [ABSTRACT FROM AUTHOR]

At various times over the last twenty years I have presented classes in finance with cases involving the choice between buying or leasing in acquiring a capital asset, and invariably I have been unhappy with the solutions proposed in the solution manuals and the literature as well as the ones presented by the students. However, my objections to these solutions did not lead to a model that represented a satisfactory general solution to the problem. I therefore read the recent paper on the subject by Johnson and Lewellen with a great deal of interest. Their review of the literature and formulation of the problem was undoubtedly facilitated by thinking on the subject because it has resulted in a model that I believe is both completely general and accurate. My model differs from the Johnson-Lewellen model more or less in the following four areas which are central to the correct treatment of the buy or lease decision: (1) the correct discount rate for a risk free cash flow; (2) a difference in term between the lease payments and the life of the capital asset; (3) differences in risk among the components of the buy and lease cash flows; and (4) neutralizing the implicit debt financing tied into the lease alternative. [ABSTRACT FROM AUTHOR]

The volume of literature on the credit-creating powers of the Euro-dollar market, although small, is growing. This paper contends that the stock of net Euro-dollar deposits (E[sub n]) can be expressed as the product of a Euro-dollar base (B) and a Euro-dollar multiplier (k). As in domestic models, the terms of the multiplier reflect asset choices of the sectors reflected by them. A parallel between the flow of funds within the Euro-dollar market and most domestic banking systems exists. Except that no single institution serves as a Euro-dollar central bank, the two systems are highly comparable. [ABSTRACT FROM AUTHOR]

The article presents a response from Keith V. Smith and John C. Schreiner (S&S) to comments Randolph Westerfield directed towards their paper entitled "A Portfolio Analysis of Conglomerate Diversification," which appeared in a 1969 edition of the "Journal of Finance." Westerfield previously asserted that a measure of diversification used in S&S's paper was inappropriate, insofar as it reflected managerial forecasting ability. The authors disagree and explain why they believe an alternative measure proposed by Westerfield is inappropriate. They do, however, acknowledge that Westerfield's commentary included some interesting theoretical content.

The theoretical analysis set forth in Section I shows that while the capital controls programs initially improve the balance of payments, this initial effect can be reversed after a time. The dynamic simulations over the period 1965:2- 1970:4 presented in Section II suggest the estimate of the control's effect in the initial year is an improvement of approximately $4.5 billion in the liquidity balance. Also, the effects are estimated to diminish gradually and continuously to an annual rate of some $2.8 billion after 5 years. [ABSTRACT FROM AUTHOR]

The article examines the functions and implications of bank capital for commercial banks. Traditionally capital has served to protect depositors from loss and instill confidence in the banking system. The author presents analysis showing that bank capital also influences a bank's financial management by modifying the maturity framework of liabilities. Although more capital is always better from a depositor's perspective, it is shown that, from the viewpoint of the bank's shareholders, an optimal capital position can be identified in principle.

This article presents a reply by the author to critiques by Robert L. Litzenberger and Charles P. Jones, and Robert A. Haugen and James L. Pappas to his work on capital structure theorem. He wishes to incorporate investor diversification among multiple assets into his theorem but he states that removing diversification contraints will not change his cost of capital theorem. Even when equilibrium in the securities market is reached, the author asserts the theorem holds up because if a firm increases its financial leverage the investor can buy both stock and bonds.

In a recent article in this Journal, W. F. Sharpe suggests that the model of investment behavior developed by Markowitz, Tobin and others can be extended in order "to construct a market equilibrium theory of asset prices under conditions of risk.'' His analysis, however, stops short of providing such an extension. His main concern is to develop what he calls "the capital market line" and to discuss the relationship between prices of assets and various components of their risk. In this note, we show that models of the form considered by Markowitz and Tobin can explain how asset prices are simultaneously determined by the interactions of investors seeking to maximize utility. In Section II below, we develop a simple modal of two assets. A general model of n assets is developed in the Appendix. [ABSTRACT FROM AUTHOR]

The article presents commentary on the address "Long-Term Trends in the Financing of Regulated Industries, 1870-1950," by Melville J. Ulmer, "Trends in Capital Formation and Financing in Agriculture," by Alvin S. Tostlebee, and Sergei Dobrovolsky's "Capital Formation and Financing Trends in Manufacturing and Mining, 1900-1953," all included within the issue addressing the development of the U.S. capital market. The application of the historical data to the development of other countries is discussed, outlining implications of U.S. economic history on general financial theory.

This article critiques an argument made by Haim Ben-Shahar, who presented a theory of the firm's capital structure from the standpoint of the return-risk framework of investor behavior. The author wishes to build upon his work by extending it to instances where investors hold diversified portfolios of common stock, as well as challenging some the Ben-Shahar's assumptions. One instance of this is his belief that investors have similar beliefs about risk and return. The author feels this is less accurate than the M&M arbitrage construct.

The article presents an exploration into the population trends of domestic and international finance markets which directly effect aggregate demand for capital. While generally outside of economic consideration, explanation is provided for the significance of population growth rates and movements in investment analysis. Various methods for population forecasting are reviewed and evaluated, including single-rate, growth curve, evolutionary, and empirical approaches. Further commentary is provided concerning its implications on national capital formation capacity estimations.

The article discusses an apparent change in policy on the part of the U.S. Comptroller of the Currency with respect to requirements for bank capital. Although nothing was formally announced, public comments by officials indicated a change in philosophy toward what constituted acceptable levels of capital. The author discusses definitions of bank capital and ratios that are used to help test for capital adequacy, and enumerates several steps he believes bank supervisors could take to further improve the banking system.

The article presents the results of a study conducted by the Bureau of Business and Economic Research of the University of California on the capital availability for postwar investment in California, with an emphasis on the concerns of small business. The article outlines the methodology, presents a survey of previous studies, the criteria for measuring the availability of capital, the data detailing the available capital from 1945-1946, a summary of the findings, and a discussion of the implications. The findings showed a large number of concerns raising capital through equity funds from owner's savings or the sale of stock, bank loans, and some manufacturing firms with intense capital needs found greater difficulty in capitalization. Proposals and recommendations are presented.

The main purpose of this study is to develop a model for evaluating the performance of portfolios of risky assets. The model begins from the Sharpe-Lintner theory of capital-asset prices, but allows explicitly for the effects of differential degrees of "risk" on the returns of portfolios--a problem which has never been satisfactorily solved. The Sharpe-Lintner results (originally derived in the context of a single-period model under the assumption of identical investor horizons) are extended to a multi-period world. In this model investors' horizons may be of different lengths and assets may be traded continuously. In addition, the Sharpe-Lintner ex ante model is extended to include ex post relationships. The resulting model expresses the expected returns on a security (or portfolio) as a function of its level of systematic risk, the risk-free return, and the actual realized returns (instead of the expected future return) on the "market portfolio" over any holding period. [ABSTRACT FROM AUTHOR]

The model presented by Bierwag and Grove appears to be extremely promising. With the modification shown here (and perhaps a few more) their approach should move us very close indeed to the general model we all want so badly. One need only consider the economic content in the solution equations of the present version to be convinced that Bierwag and Grove are well on the way to a full development of the implications of the Markowitz model of investor behavior. We will all look forward to their future work. [ABSTRACT FROM AUTHOR]