Capital markets and the costs of climate policies

Globalization is accompanied by increasing current account imbalances. They can undermine the positive impacts of increasing international cooperation and trade on economic growth and income convergence. At the same time, climate change challenges the global community and requests for co-operative action. Regional energy transformation due to climate policies and the resulting regional mitigation costs are key variables of climate economic analysis. This study is the first that include current account imbalances and imperfect capital markets to investigate potential market feedback mechanisms between climate policies, energy sector transformation and capital markets. Furthermore, it answers the question whether the capital-intensive transformation towards zero-carbon economies increases the policy cost of mitigation under the condition of imperfect capital markets. First results demonstrate a dominant baseline effect of capital market imperfections on macroeconomic variables, and moderate effects on mitigation costs in global climate policy scenarios. For some regions (e.g. Middle East) estimates of relatively high mitigation costs are revised downwards, if imperfect capital markets are considered.

Is the Value of the New Business Tax Shield Lower? Comparative Study of International Valuation Methods

The macroeconomic environment has been characterized by strong GDP growth in recent years. The favourable conditions allow the growth of new innovative businesses (start-ups), which support multiplier economic development. New businesses are often unprofitable in the first years of existence; there is a higher probability of default. The issue of start-ups may be insufficient funding, high costs of financial distress and resulting low corporate value and unattractiveness for investors. The aim of this paper is to analyse and evaluate which of the existing methods of quantifying the debt tax shield is suitable for start-ups. Three different approaches have been chosen to calculate the interest tax shield; Modigliani-Miller (1963) model for imperfect capital markets and two models from Velez-Pareja (2013,2016). The results were obtained by correlation analysis of more than 5,000 Slovak businesses, the impact of the age of the business on the value of tax shield was examined. Also, the impact of the industry on the value of tax shield was explored. The results of the analysis suggest that the quantification by Modigliani-Miller (1963) formula does not take sufficient into account of the age of company. In contrast, the Velez-Pareja (2013, 2016) models are suitable for start-ups, because they take into account the potential tax shield, which occurs when the operating income cannot cover financial costs (especially interest paid). In innovative industries, start-ups often do not reach the traditional tax shield, but their value may be higher using an alternative formula by Velez-Pareja.

Managerial Reputation, Risk-Taking, and Imperfect Capital Markets

This paper presents a model of portfolio management with reputation concerns in imperfect capital markets. Managers with financial constraints raise funds from investors and select a project that is characterized by the degree of risk. Managers differ in their ability to determine the probability of success. Based on past performance, all agents revise beliefs about managers’ ability, and the beliefs affect the availability of funds in the future. This provides motivation for managers to build reputation by manipulating their performance through project selection. We show that the quality of investor protection changes fund flows, thereby influencing managers’ project selection. Our model predicts that strong investor protection causes risk-taking behavior, whereas weak investor protection leads to risk-averse behavior.

International Real Estate Review

This paper revisits the relationships among macroeconomic variables and asset returns. Based on recent developments in econometrics, we categorize competing models of asset returns into different "Equivalence Predictive Power Classes" (EPPCs). During the pre-crisis period (1975-2005), some models emphasize that imperfect capital markets outperform an AR(1) for the forecast of housing returns. After 2006, a model that includes both an external finance premium (EFP) and the TED spread "learns and adjusts" faster than competing models. Models that encompass GDP experience a significant decay in predictive power. We also demonstrate that a simulation-based approach is complementary to the EPPC methodology.

On The Separability Of The Real And The Financial Decisions Of A Firm: A Review

This paper demonstrates the necessity for the simultaneous determination of a firms investment, production and capital structure decisions in imperfect capital markets. The non-separability of the three corporate decisions arises from the fact that the savings and/or costs due to the market imperfections for different financial packages can be imputed to the effective cost of the firms real variables. Thus, shifts in the firms capital structure lead to adjustments of the firms investment and production decisions, which in turn cause a change in the firms value. Given the necessity for an integrated approach, the paper examines the extent to which the literature has taken into account the interactions between the three corporate decisions when addressing the optimal capital structure question.