In recent financial literature a large volume of the articles dealt with asset leasing. This author and his colleagues [6] and others [7] developed the conditions under which asset leasing cannot increase the overall firm's value over normal debt leverage. Many others [2, 3, 11] analyzed the “lease-buy” decision using a variety of models and assumptions. None, however, considered the effect of asset leasing on the firm's capitalization rate. While asset leasing per se would not affect the firm's unlevered cost of capital, it should affect its estimation. This paper developed the adjustment factor to obtain the firm's corresponding unlevered cost of capital with leasing leverage. Basically, Modigliani and Miller's methodology [9] was adjusted for the different tax situation with asset leasing. The effective benefit of leasing on the firm's average cost of funds was shown to be not nearly as effective as an equivalent amount of ordinary debt.

In equilibrium, each new capital asset must be priced properly relative to other assets. If an investor can also buy and sell assets in his portfolio costlessly and quickly, then the new asset will be accepted immediately and fully into the market and it will immediately behave as though it were a seasoned or previously available asset. However, it is often argued that recently issued bonds and seasoned or fully distributed bonds behave differently due to the frictions and risks associated with distributing a new security in the market. And it is also argued that recently issued bonds undergo a behavioral transformation as they become seasoned bonds. According to this argument there are significant empirical behavioral differences between recently issued bonds and seasoned bonds [4, 5, 7, 9, 13]. These differences disappear as the market gradually absorbs the new bond issue and the bond becomes “seasoned.”

The net monetary position of a firm, defined as the nominal value of its monetary assets minus the nominal value of its monetary liabilities, partly determines the wealth transferred to (or from) the firm's owners when unanticipated price level change occurs. Price level change (a random variable) is defined as unanticipated when assessments of (the moments of) its probability distribution are systematically incorrect or biased. During unanticipated inflation, which conventionally means an underestimate of the expected value of the distribution of price level change, the real dollar returns of net monetary debtor firms are enhanced—the unforeseen honoring of debt contracts in dollars of lower purchasing power is a wealth transfer to the firm's owners from the firm's creditors. Conversely, real returns of net monetary creditor firms suffer during unanticipated inflation and gain during unanticipated deflation.

Recent financial literature has discussed how a creditor should determine its investigation and extension policy. Mehta [8, 9] has developed a sequential process for credit extension, and others [1, 2, 4, 7, 10, 12, 14] have used credit-scoring functions to develop decisions rules. Instead of discussing the use of a particular system or the development of a new system, this paper shifts the focus to selection of the best of alternative systems. Different creditors face different profit-loss ratios on loans, business volume, and prior probabilities of good and bad customers. Furthermore, since the alternative systems have different initial costs, effectiveness, and investigation costs per application, no one system is optimal for all creditors. Finally, any credit-scoring alternative declines in effectiveness over time. Measurement of the overall effectiveness of a system requires that the optimal time between updating the system be known.

In this paper, a short-run partial-adjustment model of the demand for credit union shares was specified and estimated with time series data. The estimated results were used to derive long-run, equilibrium demand coefficients and elasticities. The main conclusions are that credit union shares are substitutes for deposits at savings and loan associations, time and savings deposits at commercial banks, and marketable bonds. Moreover, the implications of the statistical results are that credit union and savings and loan shares are more closely related to more liquid assets than to long-term assets. While real income was employed as a constraint variable, it was employed as a maintained hypothesis since the use of a wealth constraint led to perverse results. Also, some evidence was presented that the elasticities of the demand function for credit union shares are different from those of an aggregate savings deposits function. Thus, it is likely that an aggregate demand function will contain aggregation bias.

This study provides, as a result of comprehensive search, a better description of the intertemporal behaviors of corporate debt policy, comparable to those that exist for dividend policy. Although leverage policy may vary a great deal from firm to firm, we found that: (1) The rather simple partial adjustment model with constant payout ratio to have the best predictive performance and other superior models include the first-order markov process and the historical average leverage ratio; (2) in general, firms seem to operate with a concept of “target leverage ratio, ” e.g., target ratio computed from the partial adjustment models, or from historical or industry averages; (3) there is some weak evidence of the presence of unused debt capacity for the total sample; (4) the average speed of adjustment to close the gap between the desired and actual leverage ratio is a respectable 67 percent in the first year (due to the lumpiness of debt issue, individual firms tend to be either under or overadjusted); (5) there are some indications that firms also adjust debt behavior to anticipated future increases or decreases in assets.There are several areas for future research, for instance, the best debt model could serve as the first stage of a possible two-stage equation in the empirical verification of the MSM's assumption of the independence of the investment decision to the financing decision (e.g., [7]), on a further exploration of how firms' expectations affect debt behavior. Finally, the existence of a rational target leverage ratio should encourage research interest concerning the existence of an empirically testable optimal leverage ratio.

The purpose of this note is to present a simple computational algorithm to approximate the E, S portfolio selection model. The essential feature of the model is the utilization of the familiar linear programming framework by representing risks as a series of linear constraints. Suppose we have m states and n securities, and we assume the investor is able to specify the contingent returns for all securities in each state. Following [7], we define risk as being the downside deviation from the investor's target rate of return.

Prior to the recent experience with relatively flexible exchange rates, there was much concern that a high degree of exchange-rate flexibility might somehow overburden the institutions of the foreign-exchange market, particularly the forward market, with disruptive consequences for international commerce. While seldom clearly stated, the reasoning underlying this concern usually proceeded along the following lines. Substantial exchange-rate flexibility would lead business management to expect greater exchange-rate variations, with the result that businesses would seek to cover much more of their foreign-exchange exposure (i.e., would seek to “insure” against the greater exchange-rate risk) by purchasing or selling foreign currency forward. However, foreign-exchange traders either could not accommodate this greatly increased demand for their services, or could accommodate it only at substantially higher cost. Consequently, business firms would significantly reduce the volume of their international transactions.

Peter S. Chung, An Investigation of the Firm Effects Influence in the Analysis of Earnings to Price Ratios of Industrial Common Stocks, The Journal of Financial and Quantitative Analysis, Vol. 9, No. 6 (Dec., 1974), pp. 1009-1029

The purpose of this study is to analyze the behavior of the cost of equity capital in the commercial banks by looking at whether there exists an optimal composition of the bank “fund structure” that would maximize bank earnings through the minimization of its cost of funds. The analysis should give an approximate cut-off point for testing such projects as “checking plus, ” checkless payment systems, etc.