Knowledge that Transforms

Professor Solow's article, “Technical Change and the Aggregate Production Function, ” now virtually classic, has made a great impact on economists generally and in the last few years the subject has received unprecedented attention in economic literature. The reason for this extraordinary emphasis on “Technical Change” has been the conclusion—in Solow's above-mentioned article—based on statistical evidence, that gross output per man-hour in the United States nonfarm economy doubled over the period 1909–1949, “with 87.5 percent of the increase attributable to technical change and the remaining 12.5 percent to increased use of capital.”

If all urban renewal projects were perfectly divisible and completely independent of one another, and if the urban renewal authority had perfect foresight as well as unlimited funds, the investment decision would be ideally simplified. There would be no need to choose between competing projects, and the urban renewal authority could evaluate each project on its own merits, without reference to any other project. Its decisions would be merely decisions to accept or reject single projects, uncomplicated by portfolio considerations.

Corporations tender for their own shares for a variety of reasons. Some stock tenders are made for strategic purposes—to prevent a take-over, to raise the market price of the stock, or simply because the stock represents ‘a good investment.’ For discussion of tendering in these situations, see the articles of Ellis [2] and Guthart [1]. In addition, there may be tactical reasons for a stock tender; one such reason is to reduce bookkeeping and shareholder servicing costs. In this instance, the argument runs roughly as follows: “The annual cost of servicing a holding is independent of the number of shares; consequently, the cost per share of servicing small holdings is relatively great. Let us reduce these high per-share costs by buying up small holdings.” Typical procedure is to then mail out an offer to buy holdings of less than a certain size directly, thus permitting the shareholder to dispose of his holding without paying the usual brokerage and odd-lot fees. Frequently no premium is offered except for the avoidance of brokerage fees. If one were to consider the premium offered as a controllable variable, it would be surprising to discover that its optimal value were exactly zero. One also recognizes that the maximum shareholding tendered for may be another decision variable available for optimization. See the appendix for data on tenders of this sort made in recent years. The variety of policies seems to indicate an almost complete absence of systematic application of the ideas presented here.

Two measures of investment worth: the discounted-rate-of-return and the payback method will be compared here. Many examples can be found in the literature illustrating the serious limitations of the payback method.According to these examples, an investment proposal may be judged economically undesirable when in actual fact it is highly profitable. This happens when the annual cash flow is not equal, and the investment project promises a relatively large cash flow after the cut-off period.

The most conspicuous deficiency of my study of underwriting compensation is my failure to examine the determinants of underwriting spreads on tax-exempt bond issues. That deficiency has now been remedied by Richard West. Unfortunately, my study was not published very long before West's and there was little opportunity for him to compare his results and speculation with my own. Although a few of the comments below are critical of West, and I point out some alternative interpretations of his statistical findings, this note should be considered a supplement to, rather than a critique of, West's paper.

William R. Sloane, Arnold Reisman, Stock Evaluation Theory: Classification, Reconciliation, and General Model, The Journal of Financial and Quantitative Analysis, Vol. 3, No. 2 (Jun., 1968), pp. 171-204

The purpose of this paper is to estimate empirically the effect of the deferred call provisions on corporate bond yields using the conceptual framework of callable and call-free yields developed by Jen and Wert [3]. After reviewing briefly the above-mentioned study in Section I, Section II presents patterns of callable and call-free yields of deferred issues from January 1956 to June 1961 by grades, months of offering, and coupon rates and contrasts them with those of the freely callable issues. Section III further contrasts yields of deferred issues with those of freely-callable ones on a pair comparison basis, while Section IV discusses the implication of the study for both the issuers and the investors.

The arithmetic formulas appearing in the mathematics of finance are practically useless unless one has available either excellent tables and infinite patience, or working computer programs, a machine, and a budget. The present article shows how a number of useful topics in this area can be dealt with effectively by the more tractable mathematics of continuous processes. The methods yield approximate answers of high quality, and in some cases exact answers as well, with small effort, and have obvious applications in “truth in lending” investigations.