It assumes that there are benefits to leverage with capital structure used until an optimal capital structure is attained. The theory recognized that debt interest is tax deductible. This reduces tax liability thus increasing tax shield. A high proportion of debt in a company makes it very risky for investors to invest in it hence they demand a high premium on stock or high dividend. The theory assumes that a firm has an optimum capital structure based on trade off between costs and benefits of using debt.
As aggregate demand affects the supply (production, employment and inflation) they saw it as the government's role to build it back up using monetary and fiscal policies. Similar to Classical economists, Keynesian believe the economy comprises the same part: consumer spending, government spending, and business investments. However the major difference is that Keynesians believed government spending could help account for the lack of consumer spending and investment. The Keynesian theory also was based on the idea that wages and prices were sticky and that is would give aggregate supply a horizontal line in the short run. Overall, the main idea of the Keynesian Economist was to save and create jobs and
It expands portfolio theory and helps us to calculate the unexpected risk of asset. As long as we know the risk-adjusted expected return of the asset, we can assess the asset's price as correct. Although CAPM allows us to determine the rate of return required for any risky asset to determine its price, but CAPM is actually used primarily to evaluate common stock. Use the CAPM it may requires some assumptions, including the following: There is risk-free asset so that investors can lend or borrow at a risk-free rate of return. Investors agree on the expected rate of return and probability of these returns.
CAPM is used as starting point for the concept of portfolio theory and asset pricing, however despite despite its seductive simplicity, the CAPM's empirical problems probably invalidate its use in applications. (Fama et al 2004) Therefore it is important to examine CAPM’s empirical tests as there have been a substantial number of hypothesis tests developed to test the structure of the CAPM model and also to investigate some of the alternative asset pricing models in comparison of their concepts and validity. Most of these tests have examined the past to determine the extent to which stock returns and betas have corresponded in the manner predicted by the single linear factor, the security market line. Generally there has been vigorous debate
Being the oldest surviving and most controversial theory in economics, the quantity theory of money has flourished over time in examining long run neutrality of monetary changes (Fisher, 1896: Cited by Dimand). Technically, the quantity theory of money denotes the direct correlation between money supply and price levels (Hume, 1752: Cited by Dimand). Money supply is the annual ratio of the stock of money in circulation or in liquid form to value of transactions performed . Also, price levels encompass the overall measure of prices in a country . Therefore, the quantity theory of money projects in simple terms that, if people hold too much money in liquid form for purchases, the price level of goods would rise up.
According to Ariff, M., Chung, T. & Shamsher, M. (2012), the findings support that liquidity effect on stock market return. An increase in money supply lead to increase aggregate demand and economic activity. This will also cause higher liquidity, and making people feel wealthier and thus they will more prefer to invest rather than
First, the ratio per se is very intuitive hosting the idea that the stronger the response of returns, the less liquid is the stock. Second, this illiquidity ratio is consistent with other theoretical concepts (Kyle (1985), Pastor & Stambaugh (2003)). It is aslo shown in Cochrane (2005a) that the ratio may have a “price discovery” component when the trading is motivated by information that changes expectations about future share price movements. Third, Amihud’s illiquidity measure is reciprocal to the Aminvest ratio that is widely used by professionals. Nevertheless, Florackis et al.
Including a proxy for the return on human capital enhances the predictive ability of the model Jagannathan and Wang (1996) and allowing beta to vary over time reduces the explanatory power of size and book-to-market variables. Clare and Priestley (1998) find a positive and significant relationship between beta and average stock returns. A thesis by Gillette (2005), states that the presence of anomalies may point out to market inefficiency since it should not be possible to earn excessive returns based on observable firm characteristics such as size and book to market
cycles that can roughly be identified with Juglar cycles . The most interesting economic variables are therefore the national product, the aggregate price level, and unemployment rate. Some models generate harmonic time series and can be viewed as explanations for abstract and isolated Juglar or Kitchin cycles, while other models are able to generate irregular time series with varying frequencies. The common feature of most models concentrate on economic variables which exhibit an upward motion for a considerable time interval followed by a downswing and an eventual recovery ,i.e., the models concentrate on “ recurrent sequences of persistent and pervasive expansions and contractions in economic activities”. Phenomena like the structural change in a single industry , economy – wide technical progress , or adoptions to very short –term stochastic influence will be ignored in most presented models
It is usually measured by the current assets to current liabilities (current ratio). It shows the ability to convert an asset to cash quickly and reflects the ability of the firm to manage working capital when kept at normal levels. According to Subrahmanyam and Titman (2001), liquidity improves firm operating financial performance. Firms with more liquid assets are less likely to fail for they can realize cash at the time of need thus outperforming those firms with less liquid assets. Browne (2001) suggests that performance is positively related to the proportion of liquid assets in the asset mix of non-financial firms.